Budgeting in Russia - OECDBUDGETING IN RUSSIA.

ISSN 1608-7143

OECD Journal on Budgeting

Volume 8 – No. 2

© OECD 2008

Budgeting in Russia

byDirk-Jan Kraan, Daniel Bergvall, Ian Hawkesworth, Valentina Kostyleva

and Matthias Witt*

Russia’s budgeting procedures have been in transition since the adoption of theBudget Code in 1998. Major revisions of the Code were undertaken in 2003,2004 and 2007. This article explores the key characteristics of budgeting in theRussian Federation. The article examines budget formulation, parliamentaryapproval, budget execution, accounting and auditing, and financial relationsbetween levels of government.

* Dirk-Jan Kraan and Ian Hawkesworth are, respectively, senior economist and administrator in theBudgeting and Public Expenditures Division of the Public Governance and Territorial DevelopmentDirectorate, OECD. At the time of writing, Daniel Bergvall and Valentina Kostyleva were, respectively,project manager and consultant in the same division. Matthias Witt is a senior economist at GermanTechnical Cooperation (GTZ).

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BUDGETING IN RUSSIA

PrefaceThis review of the budget procedure of the Russian Federation was carried out as part

of the work programme of the OECD Working Party of Senior Budget Officials (SBO) to

which the network of Senior Budget Officials of Central, Eastern and South-Eastern

European countries reports. The network was established in 2004 at the initiative of the

Working Party of Senior Budget Officials. Budget reviews serve as a basis for the

examination of the budget procedure during the annual meetings of the Working Party or

the network, and enable the participants to discuss the budget procedure of the country

under examination in depth.

A mission consisting of Dr. Dirk-Jan Kraan (head), Mr. Daniel Bergvall, Mr. Ian

Hawkesworth, Mrs. Valentina Kostyleva (OECD Secretariat) and Dr. Matthias Witt (German

Technical Cooperation) visited Moscow from 1 to 5 October 2007 to carry out the review.

During its visit the mission met with: Mrs. Tatiana Nesterenko, Deputy Minister of Finance,

Mr. Alexey Lavrov, Director of the Budget Policy Department, Mr. Roman Artiukhin, Head of

the Federal Treasury, and senior officials of the Ministry of Finance of the Russian

Federation; Mr. Dmitry Amunts, Deputy Minister of the Ministry of Culture and Media;

Mr. Vadim Dubinkin, Head of the General Audit Department of the Accounts Chamber of

the Russian Federation; Mrs. Vera Kotelnikova, Deputy Head of the Secretariat of the

Budget and Tax Committee of the State Duma of the Russian Federation; Mr. Evgeni

Bushmin, Chairman of the Budget Committee of the Council of Federation of the Federal

Assembly; Mr. Sergei Drobyshevsky, Head of the Budget Policy Unit, and other senior policy

analysts of the Institute of the Economy in Transition; Mrs. Olga Yastrebova, Director, and

other senior policy analysts of Ecorys-NEI Research and Consulting; Mrs. Elena

Lebedinskaya, Senior Policy Analyst of the Economic Expert Group; and Mr. Neven Mates,

Senior Resident Representative of the International Monetary Fund in Moscow.

OECD budget reviews are meant to serve as a basis for peer review among budget

officials. They can only serve this purpose if they are based on accurate information about

the decision-making process and the incentives and constraints that determine its

outcomes in each of its stages. This information is not always available in official

documents. Nevertheless, the mission feels that it has acquired a fair picture of the

Russian budget process thanks to the frankness and openness that have characterised the

discussions with the Russian officials throughout the mission’s visit. The mission would

like to express its gratitude and appreciation for the cordial reception by the Russian

authorities and for their helpful attitude during the meetings.

The mission would like to thank Mr. Alexey Lavrov, Director of the Budget Policy

Department, and his collaborators for the excellent organisation of the meetings, their

unsparing help with the collection of information and documents, and their hospitality

during the mission’s stay in Moscow. Finally, the mission would like to thank Sergei

Ponomarev (OECD Moscow Office) for his great help with the organisation of the mission

and useful advice concerning the conduct of the review.

OECD JOURNAL ON BUDGETING – VOLUME 8 – No. 2 – ISSN 1608-7143 – © OECD 20082

BUDGETING IN RUSSIA

The views expressed in this report are those of the OECD Secretariat and should not be

attributed to any organisation or individual consulted for this review.

1. Introduction

1.1. General characteristics

Since the economic, monetary and political turbulence of the 1990s, the Russian

economy has moved into a more stable pattern of development. Thanks to a more steady

policy course followed by the fiscal and monetary authorities and the gradual expansion of

revenues from oil production, the economy has grown since 2000 at an average rate of 6.7%

annually (OECD, 2006). Simultaneously, the situation of the public finances has

considerably improved. The general government surplus was 8.4% of GDP in 2006 and 4.9%

in 2007 (non-oil deficit 4.4% of GDP in 2006 and 5.3% in 2007).

Russia is a federal state. The government is structured in three layers: federal, regional

and local. Federal expenditures amounted to 15.9% of GDP in 2006 and 17.5% in 2007. At the

regional level, there are six types of governments. The names and distinctions have a

historical background and little actual significance. The geographical size and population

of the regional governments vary considerably. The average population is 1.7 million.

Regional expenditures amounted to 11.3% of GDP in 2006. At the local level, the

government structure is complex because of the variety of bodies. Basically there are two

sub-layers at the local level: upper-level municipalities (mostly municipal districts) and

lower-level municipalities (urban and rural settlements). Municipal expenditures

amounted to 5.6% of GDP in 2006.1 Both regions and municipalities receive a significant

share of their revenues from federal grants.

There are three federal extra-budgetary funds in Russia. The budgets of these funds

are presented to Parliament along with the federal budget. Decision making is fully co-

ordinated with the regular budget process. The funds are: the State Pension Fund, the

Social Insurance Fund, and the Federal Mandatory Health Insurance Fund. All three are

social security funds. The revenues mostly come from earmarked taxes. Total expenditures

of the funds amounted to 6.9% of GDP in 2006 and 7% in 2007. At the regional level, there

are the Territorial Mandatory Health Insurance Funds. The regional budgets of these funds

are closely co-ordinated with the regional budgets in a way that is similar to the federal

funds and budget. Federal and regional extra-budgetary funds receive a significant share of

their revenues from federal and regional transfers, respectively.

Table 1 shows an overall picture of the expenditure and revenue flows in the Russian

government sector.

In recent years, the Russian economy has become more integrated with the rest of the

world. Exports have increased at an average annual rate of 7.4% from USD 101.9 billion

in 2001 (of which USD 52.2 billion oil and gas) to USD 303.9 billion in 2006 (of which

USD 190.8 billion oil and gas). Import volumes have increased at an average annual rate of

20.5% in the same period, from USD 53.8 billion in 2001 to USD 164.7 billion in 2006 (IMF,

2006b and 2007). The Russian authorities hope to complete accession to the World Trade

Organisation by early 2008. Russia is a long-standing member of the IMF. In May 2007, the

Council of the OECD recognised Russia as a candidate member and opened negotiations

aimed at accession.

Russia is the largest country in the world in terms of surface, stretching from eastern

Europe to the Pacific Ocean. It has a population of 142.8 million (2006). From an economic

OECD JOURNAL ON BUDGETING – VOLUME 8 – No. 2 – ISSN 1608-7143 – © OECD 2008 3

BUDGETING IN RUSSIA

point of view, there is a considerable demographic problem in that the total population is

decreasing, on average by 0.4% annually or by some 6 million over the period 1995-2005

(OECD, 2006), notwithstanding a substantial immigration mainly from countries belonging

to the Commonwealth of Independent States (CIS: countries belonging to the former Soviet

Union). At present (2007), the total birth ratio stands at 10.6 per thousand, one of the lowest

in Europe, and the fertility ratio2 stands at 1.43 (Ministry of Finance of the Russian

Federation, 2007). Immigration surged from an average of 130 000 annually over the

period 1985-92 to a peak of 810 000 in 1994 and declined since then to 128 000 in 2006 (IMF,

2006c).

Since the dissolution of the Soviet Union in 1991, the Russian Federation is a federal

republic with a presidential system of government. The constitutional changes of

the 1990s have led to a thorough modernisation of the legal framework of the republic. The

President is elected directly by the population through universal suffrage. The Parliament

consists of two houses, the State Duma and the Council of Federation. The Duma has

450 members and is elected directly by universal suffrage. The Council of Federation is

elected by the 85 “constituent territories of the Federation” (the regions). The President

appoints the Prime Minister and the Ministers. According to the Constitution (Art. 117), the

Council of Ministers, further to be called the (federal) government, needs the confidence of

the State Duma, but due to the large majority of United Russia since 2000, it has not yet

occurred that the government or ministers have been forced to resign. The Constitution

contains guarantees for the independence of the judiciary branch of government. Similarly,

the independence of the Accounts Chamber is guaranteed by the Constitution.

Of the employed working population of 66.9 million persons (2005), 10.8% (about

7.2 million) worked in agriculture, hunting, forestry and fishing, 21.8% (about 14.6 million)

in industry and 48.6% (about 40 million) in services, of which 21.4 percentage points

(14.1 million) in public administration, defence, education, health care and social work.

Unemployment was estimated by the International Labour Organisation at 7.6% of the

working population (2005, based on employment surveys). Registered unemployment

Table 1. Expenditure and revenue flows in the Russian government sector, 2006Per cent of GDP

Total revenues

Of which transfers from other budgets

Total expenditures

Of which transfers to other

budgets

Balance (+ is surplus)

General government 39.6 0.0 31.2 0.0 8.4

Federal government 23.3 0.1 15.9 5.6 7.4

Federal extra-budgetary funds Of which:

7.0 3.5 6.9 0.4 0.1

State Pension Funda 6.1 3.1 5.7 0.0 0.4

Social Insurance Funda 0.8 0.1 0.8 0.0 0.0

Federal Mandatory Health Insurance Funda 0.5 0.3 0.4 0.4 0.0

Regional governmentb 11.8 2.3 11.3 3.2 0.5

Local governmentb 5.7 3.3 5.6 0.3 0.0

Territorial Mandatory Health Insurance Fundsa 1.3 0.4 1.3 0.0 0.0

a) Data for separate extra-budgetary funds were obtained from the Russian statistical agency (Rosstat) and are notcompletely consistent with Treasury data.

b) Data for regional and local government were obtained from the Ministry of Finance and are not completelycompatible with Treasury data.

Sources: Rosstat (2007), “Report on the socioeconomic situation of the Russian Federation for January-July 2007”,Rosstat, Moscow; Federal Treasury (2006), “Financial Reports”, Government of the Russian Federation, Moscow.


BUDGETING IN RUSSIA

stood at 1.8% of the working population, of which 1.5 percentage points received

unemployment benefits. These numbers make clear that Russia is an industrialised

country with a still large agricultural sector, an already well-developed services sector, a

moderately sized government sector3 and still sizeable unemployment.4

Russia still has a long way to go in order to reach a level of prosperity that is

comparable with that of OECD countries. In terms of purchasing power parity, Russia’s per

capita GDP was about 37% of the OECD average in 2005 (OECD, 2006). A disparity of this

magnitude is characteristic for many eastern European countries. It implies that

convergence with the western European level of prosperity will only occur over the next

30 years, if these countries’ economies succeed in growing at a pace that is annually 3-4%

higher than that in the OECD area. Russia has an advantage in this respect over other

countries in the region by its wealth of natural resources, in particular hydrocarbons (oil

and gas) and metals. On the other hand, this advantage also poses a particular challenge in

that it leads to a permanent external trade surplus and an appreciation of the currency.

Furthermore, over the last few years rising oil and gas exports have been accompanied by

a huge improvement in the terms of trade that have occurred since the beginning of the

21st century as a consequence of the surging oil price.5 This may threaten the

competitiveness of the Russian industrial and services sectors in tradable goods and

services in both foreign and domestic markets and could lead to the syndrome of “Dutch

disease” if handled in the wrong manner.6 So far, Russia has largely resisted the inclination

to spend too much of its oil and gas wealth on imports, but the major challenge that still

lies ahead is the development of its own productive capacity.

According to international assessments, the Russian economy is presently close to full

employment of the existing stock of capital and labour (OECD, 2006; IMF, 2006a and 2007).

Furthermore, due to flexible labour law, enterprises have been able to fire and hire

relatively easily, resulting in an efficient reallocation of production factors. Consequently,

the opportunity for further “cheap” growth by raising total factor productivity is reaching

its limits. This implies that the future growth of the Russian economy has to come from

investment, both in the market and the public sector. But in these respects, Russia has

been lagging behind many eastern European countries in comparable stages of transition

such as the Baltic countries, the Czech Republic, Hungary and Poland (in Russia average

annual gross fixed capital formation over the period 2000-05 was 18% of GDP whereas in

the mentioned countries it was between 20 and 30% of GDP; compare also with China,

where it was 39% of GDP; in 2006 Russian gross fixed capital formation stood at 20.2% of

GDP). The share of foreign direct investment in Russia, at around 15% in 2006, is also much

lower than comparable transition countries.7

So far, in spite of low investments, economic growth has remained strong in Russia.

The main driver of growth is consumption spurred by annual increases of real incomes of

more than 10% and by tax relief. Inflation remains relatively high at 9% (measured by the

consumer price index in 2006) reflecting the policy of the Central Bank to control the

appreciation of the rouble through direct intervention in the money markets. The

monetary authorities are committed to a gradual reduction of inflation to 6-7% in 2008 and

then a half per cent decrease in following years until an acceptable level of 3-4% is reached

(Ministry of Finance of the Russian Federation, 2007), but in 2007 inflation has picked up

again and it remains to be seen whether the long-term aim remains realistic as long as the

Central Bank clings to its policy of controlling the exchange rate.8 Consistent with the rapid

real appreciation (nominal appreciation plus inflation), growth is concentrated in the


BUDGETING IN RUSSIA

non-tradable sectors: retail trade and construction running well above 10% real growth. In

manufacturing, growth is in line with overall growth at about 6-7%. Growth in oil

production has not recovered from its decline in 2004-05 when it fell from 12% to 3% as a

consequence of limited pipeline capacity and the lack of development of new fields.

Table 2 presents the growth performance of Russia in comparison with the 15 (older) EU

countries and the 12 EU accession countries (of Central and Eastern Europe). It appears

clearly that, despite low investments, Russia is still doing better than the EU countries in

Central and Eastern Europe.

Proceeds from oil production make up a considerable part of the revenues of the

Russian Federation. These flows accrue to the budget by way of the mineral extraction tax,

which is levied on oil extraction at a rate of 22% of the excess over USD 9 per barrel (Urals),

and the export customs duty on oil, which is levied at a progressive rate of the excess over

USD 15 c.i.f.9 per barrel. Although estimates vary, the combined marginal taxation rate of

the mineral extraction tax and the exports customs duty on oil is above 80% and the

combined average tax rate on oil is above 70% (in 2006) (OECD, 2006).. A part of the oil

revenues of the federal government is saved in the Oil Stabilisation Fund.10

Figure 1 shows the development of expenditures and revenues of the federal

government. Oil revenues of the federal government11 are indicated separately. The

numbers over the period 2007-10 are presented in accordance with the budget documents

accompanying the budget for 2008-10.12

Since the financial crisis of 1998 when the rouble lost two-thirds of its value, Russia

has practiced a prudent fiscal policy. This has contributed to the revival of private

investment and persistent high real growth in the subsequent years.13 Since 2000, federal

budgets have been based on conservative oil price assumptions. This approach has

delivered sizeable surpluses. Moreover it has shielded the economy from price volatility in

the oil market. The government has largely resisted the temptation to spend the oil

revenue windfall and instead has used a significant part of it to repay debt and to

accumulate reserves. In the years after the crisis, there have been deep cuts in

expenditures (including all levels of government and social security funds), mostly by

reducing salaries and pensions in the public sector. In 2003, expenditures were about

10 percentage points of GDP lower than before the crisis, while revenues relative to GDP

were at roughly their pre-crisis level. In the period 2005-07, there was considerable slippage

of fiscal discipline. The federal non-oil deficit was allowed to increase by 2.6 percentage

points of GDP (in 2007 relative to 2004). In 2006 and 2007, supplementary budgets were

approved halfway through the year with sizeable new spending plans. Additional spending

in this period focused on the areas of health care, housing, education, agriculture,

Table 2. Growth of real GDPPer cent change on previous year

2002 2003 2004 2005 2006 2007a 2008a

EU15 (older) 1.1 1.2 2.3 1.6 2.8 2.7 2.5

EU10/12 (accession) 4.1 4.3 5.3 5.8 6.2 5.5 5.0

Russia 4.7 7.3 7.2 6.4 6.7 7.0 6.8

a) Forecasts.Sources: Eurostat database (for EU15, EU10/12); IMF, World Economic Outlook database (for Russia); OECD calculations (forEU10/12 forecasts).


BUDGETING IN RUSSIA

infrastructure, the military and the judiciary. Much of this spending was targeted for wage

increases which the authorities considered essential to facilitate reforms. In addition,

transfers to the pension fund were increased to compensate for a substantial cut of the

unified social tax and continued compliance problems. The supplementary budget for 2007

aimed in particular to boost investment by subsidies to research programmes and to the

aluminium, petrochemical and nuclear power sectors. Because of the surging oil prices, the

decrease in the overall balance induced by these additional spending programmes has

remained modest (1 percentage point of GDP relative to 200414). The new three-year budget

for 2008-10 supposes considerable restraint in the year 2008 and retrenchment of

2 percentage points of GDP in the years 2009-10. Whether these plans will be realised

remains to be seen (IMF, 2006a and 2007).

On the revenue side, major reforms in the tax system took place in the period 2000-04.

The most important steps included the introduction of a flat-rate income tax of 13%, the

introduction of the unified social tax (that finances the social security funds), the

elimination of the various sales taxes, the lowering of the rate of the profit tax from 35% to

24% in conjunction with the abolition of numerous tax breaks, the introduction of the

mineral extraction tax, and the lowering of the rate of the value-added tax from 20% to

18%. Except for the introduction of the mineral extraction tax, these reforms were

generally aimed at broadening the tax base and relieving the tax burden. These reforms

were facilitated by the gradual increase of the federal oil revenues.

Table 3 shows the resulting federal government and general government balance. The

convergence of the primary and overall balance in the period 2002-06 reflects the rapid

repayment of the external public debt. The improving overall balance since 2004, in spite of

the deteriorating non-oil balance since 2004, reflects the increasing oil revenues.

Due to the increasing oil production since 200015 and surging oil prices in the period

since 2003, oil revenues have risen steadily. The Oil Stabilisation Fund, established in 2004,

had reached its statutory minimum size of RUB 500 billion at the beginning of 2005.

Figure 1. Expenditures and revenues of the Russian FederationIn per cent of GDP

Source: Ministry of Finance of the Russian Federation (2007), “Main Results and Trends of Budget Policy 2008-2010”,Government of the Russian Federation, Moscow.

2002 2003 2004 2005 2006 2007 2008 2009 2010

30

25

20

15

10

5

0

Total expenditure Total revenue Oil revenue


BUDGETING IN RUSSIA

Subsequently, its size has risen to about RUB 4 700 billion at the end of 2006. According to

the Budget Code, sums in excess of RUB 500 billion may be spent on unspecified “other

purposes” with the consent of Parliament (such spending must be specified in the annual

budget law). Hitherto the government has mainly used these surplus revenues for early

repayment of foreign debt. In particular USD 23 billion was repaid in 2005, mainly to the

Paris Club of creditor countries, and another tranche of USD 33 billion was repaid in 2006.

Since domestic debt has been relatively small since the late 1990s, public debt has fallen to

insignificant levels in Russia. Figure 2 portrays this development.

Table 3. Budget balance of the federal government and the general government in Russia

Per cent of GDP

2002 2003 2004 2005 2006 2007 2008 2009 2010

Federal government:

Primary balance 3.4 3.4 5.4 8.4 8.0 3.8a 0.7a 0.5a 0.6a

Overall balance 1.3 1.7 4.3 7.5 7.4 3.3a 0.2a 0.0a 0.0a

Non-oil overall balance –4.4 –2.7 –2.2 –2.9 –3.6 –4.8a –6.6a –5.9a –5.3a

General government:

Primary balance 2.7 3.3 6.1 9.1 9.2 5.5a 3.3a n.a. n.a.

Overall balance 0.6 1.4 4.9 8.2 8.4 4.9a 2.8a n.a. n.a.

Non-oil overall balance –6.9 –4.6 –2.9 –4.6 –4.4 –5.3a –6.6a n.a. n.a.

n.a.: Data not available.a) Forecasts.Sources: For 2002-03: IMF (2006), “Russian Federation: Statistical Appendix”, IMF Country Report No. 06/431,International Monetary Fund, Washington DC; For 2004-06 and 2007-08 General Government: IMF (2007), “RussianFederation: 2007 Article IV Consultation – Staff Report; Staff Statement; and Public Information Notice on theExecutive Board Discussion”, IMF Country Report No. 351, International Monetary Fund, Washington DC;For 2007-10 federal government: Ministry of Finance of the Russian Federation (2007), “Main Results and Trends ofBudget Policy 2008-2010”, Government of the Russian Federation, Moscow.

Figure 2. Public debt of the Russian FederationIn per cent of GDP

Source: IMF (2007), “Russian Federation: 2007 Article IV Consultation – Staff Report; Staff Statement; and PublicInformation Notice on the Executive Board Discussion”, IMF Country Report No. 351, International Monetary Fund,Washington DC.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

40

35

30

25

20

15

10

5

0

Public sector debt Foreign-currency denominated public sector debt


BUDGETING IN RUSSIA

1.2. Institutional policy in the recent past

Since the beginning of the century, Russia has thoroughly reformed its budget

procedure. Important stages in this reform effort were the adoption of the Budget Code

in 1998 and major revisions of the Code in 2003, 2004 and 2007. In parallel, international

organisations have regularly assessed the Russian budget institutions and formulated

recommendations. The reforms were largely in accordance with the recommendations but

sometimes not. This section will briefly review the most important of these reforms and

recommendations.

The Budget Code of the Russian Federation was adopted in July 1998, shortly before

the financial crisis, and entered into force in 2000, shortly after the crisis. The Code put the

budget process in Russia on a modern footing. It sets out the contents of the annual budget

laws, defines the jurisdictions of the federal and regional governments and regulates their

financial relations, prescribes the annual budget preparation and execution time schedule,

and lays down rules for the public debt. Moreover, the Budget Code introduced a Single

Treasury Account, held at the Treasury, and forbade all cash holdings in domestic currency

by government agencies outside this account. This was a first important step on the long

road to the abolition of extra-budgetary spending in Russia. The Code explicitly embraces

the principle of openness, mandates the publication of the draft budget law and budget

execution reports, and prescribes an extensive set of documents that must accompany the

budget bill when it is submitted to Parliament.

Major revisions of the Budget Code were enacted in 2003 and 2004. The revision

of 2003 created the Oil Stabilisation Fund. The revision of 2004 led to a reform of the fiscal

relations with the regions and prescribed fiscal rules for sub-national government.

The Oil Stabilisation Fund was established in 2004, following the 2003 amendment of

the Budget Code. The statutory purpose of the fund was to insure the federal budget

against oil price volatility. Revenues were flowing into the Fund from the mineral

extraction tax (95%16) and the export customs duty on oil (100%) in excess of the cut-off

price of the Oil Stabilisation Fund. The cut-off price was first set at USD 20 per barrel (Urals)

and raised to USD 27 per barrel (Urals) in 2007. By law, the resources of the Oil Stabilisation

Fund could be used to finance the federal budget deficit when the oil price was below the

cut-off price. If the accumulated resources reached RUB 500 billion (about 2% of GDP), the

resources of the fund could be used for certain other purposes, such as the repayment of

foreign debt.17 As a temporary measure, resources from the Fund were also used in 2005 to

finance the gap in the pension fund that emerged due to a cut in the unified social tax. The

Oil Stabilisation Fund is managed by the Ministry of Finance. The only assets in which the

reserves of the Fund may be held are securities of foreign states listed by the government.

In addition to its budgetary role, the Oil Stabilisation Fund fulfils an important role in

monetary policy. In view of the objective of the monetary authorities to slow down the

appreciation of the rouble driven by the increasing oil exports and the increasing oil price,

the Central Bank intervenes on a large scale in the money market.18 According to IMF

estimates, annual broad money growth (including foreign assets) reached 48% (year on

year) in April 2007. The task of sterilisation of the resulting money creation falls mainly to

fiscal policy and in particular the Oil Stabilisation Fund.19 According to OECD estimates,

over the period from January 2004 to July 2006 about half of the net increase in foreign

assets was sterilised through general government deposits (mainly by the Oil Stabilisation


BUDGETING IN RUSSIA

Fund) at the Central Bank. Even in the view that the Central Bank should focus more on

combating inflation20 and let the rouble appreciate more rapidly, its task is certainly eased

by this role of the Fund.

In 2004, the IMF published a “Report on the Observance of Standards and Codes

– Fiscal Transparency Module” on Russian budgetary institutions. The report observed that

Russia had achieved considerable progress in fiscal transparency and financial

management since 1990, but that a number of important reforms remained to be

undertaken. The report noted that the legal framework of the budget process, the tax

system and the financial relations between levels of government had been reformed and

put on a modern footing. The Central Bank was seen as independent. Macroeconomic

forecasts were assessed as sound and open to scrutiny. Medium-term budget policy was

specified. Budget preparation was seen as transparent, and the information provided to

Parliament in conjunction with the budget as mainly adequate.21 The objectives of a

number of programmes were announced, and progress against these objectives was

reported. Military expenditures and other security-related expenditures were included in

the budget although at a more aggregate level than other expenditures. The creation of the

Oil Stabilisation Fund was seen as an important improvement. It was found that the

Treasury system had strengthened budget execution, control and monitoring. In particular,

the 31 000 own resource accounts of federal entities were nearly22 all brought under the

Single Treasury Account. The report noted that the discretion in the execution of tax policy

had been reduced. The accounting system was seen as comprehensive and accurate, and

monthly and annual reporting on financial outturns was found adequate although there

remained some quality problems and delays. External audit by the Accounts Chamber of

the Russian Federation was seen as independent, but the Chamber was found to focus on

legal and financial compliance and not on performance. The legislation concerning

privatisation was seen as transparent. However, the report mentioned that the boundaries

between the general government, the public enterprise sector and the private sector

needed further clarification. The report also noted that the regulation of the market sector

in the sphere of competition, corporate governance and monopoly pricing was incomplete

(for instance on take-overs and bankruptcy) and overly complicated. The report identified

remaining weaknesses in the financial relations between levels of government,

particularly unfunded spending mandates, lack of spending autonomy on the part of sub-

national governments and frequent changes in tax-sharing arrangements hampering the

planning capacity of sub-national governments. The report noted that debt management

was underdeveloped.

The OECD (2006) observed a number of institutional changes that pointed to a more

active role for the state in the economy. In the late summer of 2005, a number of “national

priority projects” were defined and implemented in the 2006 budget. They aimed to

provide substantial new resources to address chronic weaknesses in parts of the public

sector that had long suffered from underfunding and neglect. The projects included: the

health project, the education project, the housing project and the agriculture project.23

Furthermore, the budget of 2006 created an Investment Fund that was intended to provide

financing for joint public-private investment projects that would stimulate socio-economic

development by creating needed infrastructure of national significance, contributing to the

innovation initiatives and facilitating structural change.24 The budget of the Investment

Fund is relatively small (0.26% of GDP in 2006 and 0.34% in 2007). A third initiative concerns

the creation of special economic zones on publicly owned land for 20 years. A law of 2005


BUDGETING IN RUSSIA

makes it possible for regional governments to create such zones if they make significant

commitments of their own. Residents of such zones are eligible for tax incentives.25 The

state will also finance the creation of the zone’s infrastructure. While commending the

government’s efforts to stimulate investments as a key to continued rapid growth of the

Russian economy, the OECD expressed a number of concerns in regard to the details of

these initiatives. Among other things, it mentioned that the Investment Fund would

require an appropriate legal framework and that the support for national priority projects

was not made dependent on structural reform in the areas concerned. According to the

report, it remained to be seen whether the new initiatives would escape the fate of

previous state programmes in the sphere of investment and economic zones which had led

to unimpressive results. The OECD also expressed concern about the rapid expansion of

state ownership in key industrial sectors. Instead of imposing and enforcing a regulatory

framework based on fair competition and best practice corporate governance, the Russian

government seeks to control these sectors by state ownership. According to the OECD

report, the poor performance of existing state-owned corporations suggests that expanded

state ownership will likewise result in poorer performance of the companies affected.

As to fiscal rules, the OECD (2006) recommended defining a medium-term fiscal target,

based on an assessment of the non-oil fiscal balance and long-run sustainability. The

report recommended reforming the Oil Stabilisation Fund and explicitly recognising its two

different objectives: one part of the Fund should be considered as a buffer against oil price

volatility while the other should be used to generate investment income. The yield of the

investments could be used to finance a structural deficit. The tax base of the Fund should

be broadened to include gas revenues. The minimum reserve of the buffer sub-fund should

be increased to match the potential impact of a sharp drop in prices. The investment sub-

fund should only gradually move to more risky assets, to avoid mismanagement and to

allow for capacity building.

The OECD (2006) paid extensive attention to the reform of public administration in

Russia. It observed that Russia is still facing big problems in this area. It observed that

public bureaucracies in Russia are not very client oriented and suffer from endemic

corruption. The report also found that the institutions charged with administrative reform

have little leverage over the bureaucracy. Nevertheless, the report commended the

government’s Concept for Administrative Reform of 2005 which is concerned with service

quality, performance management and the organisation of service delivery (based to a

certain extent on the ideas of “new public management”; see Section 4.5 below). In

addition, the OECD (2006) recommended that the Russian authorities should press ahead

with institutional reforms that are preconditions for effective and efficient public

administration (rule of law, freedom of information, parliamentary oversight), empowering

citizens vis-à-vis the bureaucracy, fighting corruption and reducing the role of the

bureaucracy in commercial affairs (deregulation, privatisation, separation of the state’s

ownership role from its other functions such as regulation and industrial policy).

In 2007, Russia thoroughly reformed its budget procedure. For this purpose, the Budget

Code was again profoundly revised. The reform was mostly consistent with the

recommendations of the IMF and the OECD, particularly on fiscal rules and the

management of the Oil Stabilisation Fund and on the clarification between general

government and the market sector. Another important institutional change was the

introduction of three-year budgets. These reforms will be addressed in the next section.


BUDGETING IN RUSSIA

2. Budget formulation

2.1. Key characteristics

There are a number of features of the Russian budget formulation process which merit

special attention. These are:

● Three-year budgets.

● Fiscal rules.

● Extra-budgetary activities.

2.1.1. Three-year budgets

Three-year budgets were introduced through the revision of the Budget Code in 2007.

Starting from the budget year 2008, the federal budget and budgets of state off-budget

funds are authorised for the next budget year and a two-year planning period.26 In practice,

budget formulation will be a rolling exercise, where a new second out-year is added to the

budget as the former first out-year becomes the budget year. The appropriations in the out-

years remain unchanged, but are inflated by the use of various indexes (including price

indices in accordance with inflation forecasts27) fixed by the Ministry of Finance and

estimates of uptake of entitlements. It is estimated that 40-50% of federal budget

appropriations finance entitlements.

In principle, new spending initiatives must be accommodated within an envelope of

additional funds set apart in the budget of the previous year. In the budget for 2008-10, the

envelope was set at 2.5% of total expenditure in 2009 and 5% of total expenditure in 2010.

This envelope is based on estimated revenue growth and is not specifically appropriated in

the budget for the two out-years. In principle, all other spending is to be kept stable28 in

real terms at the line-item level. The main discussion during budget preparation is

consequently about the distribution of the non-allocated envelope, not about the adequacy

of the existing three-year appropriations (apart from discussions about the updates).

In a comparative perspective, this arrangement seems very similar to a budget process

with multi-year estimates and ceilings as in a number of OECD countries that have moved

to fixed expenditure frameworks (see Box 1). The main difference is that the Russian

arrangement is codified as a three-year budget, allowing ministries to conclude

multi-annual procurement and investment contracts and to develop medium-term

sectoral spending and performance plans. While some protection of multi-annual

estimates is important for ministries so that they can plan, too much rigidity can also have

disadvantages. A three-year budget runs the risk of locking in expenditures, which might

be problematic in a situation where fiscal retrenchment or large reallocations are needed

(for instance, to make room for new political priorities or large reforms). In the current

environment of continuous real growth in the government budget and stable political

priorities, this risk may not be seen as an issue, but it remains a potential problem. Indeed,

one of the important arguments in favour of multi-annual frameworks is that they

facilitate retrenchments and large reallocations because such measures need a long

implementation trajectory. Under a fixed multi-annual framework, such measures can be

realised through reallocations within and between ministerial portfolios and through cuts

in extension years.29 In principle, under a three-year budget only measures in the new out-

year are possible for this purpose. However, there is some ambiguity here since, under the

Russian rules, some changes in estimates for existing programmes (reallocations, cuts,

expansions) seem also possible by way of revision of the budget in a next three-year budget


BUDGETING IN RUSSIA

Box 1. Medium-term expenditure frameworks

A medium-term expenditure framework consists of a set of ceilings or targets for totalexpenditure, budget chapters (usually ministries and constitutional bodies) and social securityfunds in the medium term: the budget year and one, two or three out-years. Many OECD countrieswork with a medium-term expenditure framework. The framework is decided at the beginning ofthe annual budget cycle and provides a top-down direction to budget preparation. This does notmean that it no longer makes sense for ministers to put forward proposals for new spending.However, such proposals have to be accommodated either within the ministerial ceiling/target orin the ceiling/target for the total (through reallocation between the ministerial ceilings). Typically,the ceiling for the total is unalterable during budget preparation (particularly for the upcomingbudget year), but the ceilings/targets for the ministries and social security funds are flexible andallow reallocation.

Apart from the discipline that follows from the early decision on the totals, the main advantageof a medium-term expenditure framework is that it allows planning in the medium term. Newspending initiatives often begin small and finish big (camel noses). Under a fiscal framework, themedium-term consequences of new initiatives have to be made visible from the beginning. Multi-annual estimates for a new initiative have to be squeezed in under the multi-annual ceiling. It isimportant in this connection that multi-annual estimates for the new initiative are realistic andnot biased in order to fit in with the ceiling. From a conceptual point of view, the distinctionbetween estimates and ceilings/targets is essential. Estimates are descriptive and should bepermanently updated to fit reality. Ceilings/targets are prescriptive and should be as stable aspossible.

Medium-term expenditure frameworks are also important for the planning of retrenchments intimes of fiscal restraint. Major cuts usually cannot be implemented in the upcoming budget year,because they require longer preparation: amendment of entitlement laws, organisational overhaul,lay-off of personnel, etc. Medium-term expenditure frameworks allow such cuts by phasing themin over the years of the framework.

Medium-term frameworks can be used in two fundamentally different ways: either they can beput up anew at the beginning of every budget cycle or they can be strictly maintained over theyears. In the first case, the framework can be called flexible because it allows adjustment. In thesecond case, it can be called fixed because the total of expenditures is maintained over the years.OECD countries such as the Netherlands, Sweden and the United Kingdom have moved to fixedframeworks. Other countries are considering this move (France, Hungary, Turkey). Fixedframeworks are not entirely unalterable. They typically allow reallocation between ministries fromyear to year, as well as updating for new inflation estimates. Moreover, the total can be changedfrom year to year under the strict condition of compensation by structural tax measures (tax reliefrequires lowering of the ceiling; the rise of the ceiling requires additional taxation). However, apartfrom these possibilities, the total of a fixed framework is unalterable from year to year. In this light,a fixed framework can be seen as a fiscal rule: it imposes a multi-annual constraint on animportant macro-budgetary parameter (expenditures). This further contributes to budgetarydiscipline, provides stability and predictability to the budget users, and has an automaticmacroeconomic stabilisation effect.

Fixed frameworks can be rolling or periodical. A rolling framework is updated from year to year (theunalterable total is confirmed) and a new out-year at the end of the planning period is added in eachbudget cycle. A periodical framework is also updated from year to year, but no new out-year is added.A periodical framework expires at the end of the planning period (usually coinciding with a cabinetperiod) and then a new framework is put up for the next planning period. Sweden has a rolling fixedframework; the Netherlands and the United Kingdom have periodical fixed frameworks.


BUDGETING IN RUSSIA

law or by a supplementary budget law during the budget year. However, these routes seem

to undermine the very idea of three-year budgets.

In order to address this problem, the Russian authorities may consider clarifying the

rules about revision. In particular, the rules could be sharpened so that it becomes clear

that reallocations within and between ministries are possible, but only under the strict

condition that the total of federal expenditures on existing programmes (excluding the

undivided envelope), as established in the budget of the previous year, is not exceeded.

This condition could explicitly be stated in the Budget Code and would imply that the

possibility of retrenchments and large reallocations is explicitly recognised. On the other

hand, it would mean that certain motives for revision that are now admitted, such as

overspending on mandatory spending programmes, would be prohibited. Overspending

would have to be compensated by savings on other programmes or, alternatively, would

have to be financed from the distribution of the undivided envelope for the upcoming

budget year. Such a provision in the Budget Code will create an incentive for ministries to

provide cautious estimates for existing programmes (pessimistic rather than optimistic

estimates). Ministers can no longer expect that too-low estimates for out-years will

automatically be corrected in the next budget year, without impairing their claims to the

undivided envelope in the next year. The provision will also encourage ministers to create

undivided envelopes for out-years within their own budgets from which set-backs in

existing programmes can be financed in future years. In addition, and in line with such

sharpened revision rules, the Budget Code could define a minimum size of the undivided

envelope in the out-years and specify that the envelope is not only available for new

spending initiatives but also for reallocation to existing programmes (in case of

overspending) and for saving in periods of fiscal restraint.

2.1.2. Fiscal rules

Since the revision of 2007, the Budget Code contains a number of fiscal rules for the

federal budget. These rules aim to put limits on the non-oil/gas balance and the use of oil

revenues for spending purposes. There are two aggregate limits: one for the non-oil/gas

deficit (non-oil/gas revenue minus expenditures) and one for the regular budget balance.

The non-oil/gas deficit may not exceed 7.1% of GDP in 2008, 6.5% in 2009, 5.5% in 2010,

and 4.7% in 2011 and then annually onward. In order to finance the non-oil/gas deficit, a

transfer from oil revenue will take place. This transfer may not exceed 6.1% of GDP in 2008,

5.5% in 2009, 4.5% in 2010, and 3.7% in 2011 and then annually onward. This leaves the

possibility of an overall budget deficit of 1.0% of GDP or less, which can be loan financed.

Since Russia exhibits real growth well in excess of 1% yearly, this in itself will mean that the

debt/GDP ratio will be falling. This set of fiscal rules is summarised in Table 4.

The remaining oil and gas revenues, that are not part of the transfer, are distributed to

the Reserve Fund or the Prosperity Fund (see Box 2).

The new fiscal rules are strict and assure sound fiscal management in Russia.30 As to

the treatment of the oil and gas revenues, there are some notable differences with the

practices in Norway and the Netherlands. Norway does not allow any current spending

from its oil revenues and puts 100% in the Norwegian Pension Fund. Only the proceeds of

the fund, amounting to 4% of the accumulated equity, is returned to the budget and can be

used to finance a deficit. In this way, the oil wealth is saved and produces an increasing

flow of income to the benefit of future generations. The Netherlands splits the gas revenue

into a part that can be used for current expenditure and a part that is channelled into the


BUDGETING IN RUSSIA

Infrastructural Fund. The latter part can only be used for capital investment (mainly in the

sphere of infrastructure). Given the present state of economic development and the urgent

need to improve public services for the present generation,31 it is comprehensible that

Russia wants to reserve a part of its oil revenues for current spending. In view of this aim,

it must be seen as a cautious arrangement that Russia has created the Oil Stabilisation

Fund (called the Reserve Fund as from 2008) to insure itself against volatility in the oil

revenue flow.

While all this is promising, it remains to be seen to what extent the rules will be

honoured. The path towards 2011 demands a marked decrease in the use of oil revenue,

from 6.1% of GDP in 2008 to 3.7% in 2011. This will require strong political will and high

economic growth to be politically acceptable.32

The new Russian fiscal rules have various features in common with the fixed multi-

annual expenditure frameworks found in some OECD countries (see Box 1). However, the

emphasis on targets for the non-oil balance suggests that there is still room for expansion

of expenditures in case of windfall tax revenues (additional tax revenues flowing from

unexpected growth as opposed to tax revenues flowing from new tax measures). This is

Table 4. Fiscal rules for the Russian Federation

Budget aggregatesLimits

2008 2009 2010 From 2011 onward

Non-oil/gas revenue – – – –

Total expenditures – – – –

= Non-oil/gas deficit < 7.1% GDP < 6.5% GDP < 5.5% GDP < 4.7% GDP

+ oil and gas transfer < 6.1% GDP < 5.5% GDP < 4.5% GDP < 3.7% GDP

= Budget balance > –1.0% GDP > –1.0% GDP > –1.0% GDP > –1.0% GDP

Box 2. The Reserve Fund and the Prosperity Fund

In 2007, the Oil Stabilisation Fund fulfilled two functions, namely insurance againstvolatility of the oil price, and using oil windfalls in a macroeconomically responsible wayto generate future income streams that help to cover structural budget deficits. In order toseparate the two functions more clearly, the Fund will be replaced in 2008 by the ReserveFund, to fulfil the price volatility insurance function, and the Prosperity Fund, to fulfil theintergenerational equity function. The Reserve Fund is capped at 10% of GDP.a All revenuesexceeding this cap are transferred to the Prosperity Fund. The tax base of the funds hasbeen expanded: in addition to 95% of the proceeds of the mineral extraction tax and 100%of the export customs duty on oil production and export, 100% of the proceeds of themineral extraction tax and the export customs duty on gas flows into the funds.b Finally,the switch mechanism for the oil and gas revenue flow between the budget and the fundshas been changed: formerly the switch occurred when the cut-off price was reached, butnow there is a nominal oil and gas transfer which is defined in the three-year budget law.

a) This cap is about five times as high as the RUB 500 billion minimum required by the former legislation. The10% cap is based on the assumption that the Fund resources make it possible to smooth the adjustment toa price drop of Urals crude oil from USD 51.7 (the price assumed in the budget for 2008-10) to USD 29.4 (theaverage price over the period 1997-2006).

b) Natural gas extraction is taxed by the mineral extraction tax, just like oil. In the case of gas, the rate isRUB 147 per thousand cubic meters. Gas condensate is taxed at a rate of 17.5% (ad valorem). The exportcustoms duty is levied on gas at a rate of 30% of the customs value contract price.


BUDGETING IN RUSSIA

explicitly recognised by allowance for the possibility that the envelope for new spending

initiatives is extended beyond the undivided envelope of the first out-year of the previous

three-year budget in the light of additional tax revenues. Insofar as such an extension is

indeed practised, the three-year budget resembles more a flexible than a fixed expenditure

framework (see Box 1). A flexible framework does not impose intertemporal discipline. Nor

does it provide for automatic stabilisation. In other words, a flexible expenditure

framework is not an expenditure rule as commonly understood. Neither is the Russian

three-year budget an expenditure rule as long as it maintains an annual limit on the non-

oil balance.

The Russian authorities may consider moving to a fixed framework, possibly after

some years of experience with the three-year budgets. This could be done by removing the

requirement on the non-oil balance and by simultaneously excluding the possibility of

extending the envelope for new spending beyond the undivided envelope of the previous

budget. Of course there is then still a need to anchor the requirement on total spending in

a target for the budget balance, but this target is a medium-term target and the actual

balance is allowed to fluctuate from year to year and “breathe with the economy”.

2.1.3. Extra-budgetary activities

In accordance with the revised Budget Code of 2007, Russia is making large efforts to

clarify the boundaries between the government sector and the market sector.33

Traditionally, Russian finance statistics were based on the distinction between the

government sector and the state sector. The Russian government sector is defined as

entities subject to the Budget Code, distinguished as federal entities, regional entities and

local entities. The government sector includes the commercial activities in which many of

these entities engage (leading to non-tax revenues estimated by the Russian authorities at

2.5% of GDP). The state sector includes the government sector and state unitary enterprises

at federal, regional and local level. State unitary enterprises are owned by the government

but work on the basis of commercial accounts and commercial legislation. They are under

ministerial responsibility, but off budget. They are auxiliary to a ministry’s activity, such as

a printing house under the Ministry of Education or a production facility for police

equipment under the Ministry of Justice. State unitary enterprises have a distinct legal

status, different from regular market sector corporations. There are also many state

unitary enterprises at the regional and local level.34 The state sector comes close to the

concept of “general government” defined by international accounting standards

(SNA 1993). The Russian government has been working hard to remove remaining

differences, and there have been considerable improvements over recent years. For

instance, the formerly off-budget revenues from commercial activities of federal entities

(other than state unitary enterprises) and the off-budget expenditures financed from these

revenues have now mostly been brought under the Treasury35 and been put on budget.36

The main remaining problems concern the integration and consolidation of the

expenditures and revenues of state unitary enterprises (insofar as they are not transferred

to the market sector) and the commercial activities of regional and local governments,

which are still largely off budget (in the sub-national governments to which they belong).

At present, the total amount of off-budget non-tax revenue of sub-national government is

estimated by the Ministry of Finance at 20% of the total revenue of sub-national

government.


BUDGETING IN RUSSIA

In order to clarify the position of the state unitary enterprises, the government is

presently considering the creation of a new type of agency, namely that of “autonomous

institutions”. State unitary enterprises that would opt for the legal status of autonomous

institutions would keep their autonomy and be allowed to undertake commercial activities

on an extra-budgetary basis. However, these institutions would belong to the market sector

in public finance statistics and could no longer engage in (quasi-)fiscal activities without

being formally subsidised (on budget). Existing state unitary enterprises would have to

choose between the status of autonomous institution, regular government entity (on

budget) or joint stock company. The status of state unitary enterprise would be abolished.

Apart from state unitary enterprises, the government holds equity shares in some

3 700 joint stock companies. Many of these are involved in government activities or quasi-

fiscal activities, and should be brought under the definition of general government or, if

remaining in the (quasi-)corporate sector, explicitly subsidised. The energy sector (gas,

electricity) is seen as the foremost area of quasi-fiscal activity. Russia has made large

efforts to curtail this activity. In the budget for 2008, room is made for subsidies to

government-owned enterprises, replacing quasi-fiscal activities, to the amount of 1.3% of

total expenditures (0.2% of GDP). However, the practice of setting energy tariffs below cost

recovery levels has not yet been abandoned.

In recent years, the Russian Federation has pursued an active privatisation policy

concerning smaller state unitary enterprises and federally owned joint stock companies (in

contrast to the nationalisation policy concerning large industrial corporations). In the

period between 1 June 2003 and 1 June 2006, the overall number of federally owned state

unitary enterprises has shrunk by 2 682 units, or 27.2% of the total, due to their liquidation,

transformation into joint stock companies and privatisation. The overall number of joint

stock companies in which the Russian Federation held equity has shrunk in the same

period by 481 units or 11% of the total. In June 2006, there were about 7 200 state unitary

enterprises at the federal level and 3 700 joint stock companies in which the Federation

held shares (see Section 4 for further details). In addition, there are many such

organisations at the regional and local level (estimated at 411 000 as of 1 July 2006; Rosstat,

2007).

The success of budget reform in the Russian Federation is to a large extent based on

the elimination of quasi-fiscal operations of state unitary enterprises and publicly owned

joint stock companies and the shift toward more transparent ways of providing public

services. Against this background, the recent introduction of a new type of unit, namely

that of “state corporations”, is a reason for concern. State corporations are more

autonomous in the management of their resources than autonomous institutions.

However, they have larger economic significance. There are now six state corporations,

some already operating, some still in the stage of preparation. They operate in areas such

as construction of Olympic facilities, production and export of high-tech merchandise,

public utilities, housing, nanotechnology, banking and insurance. In 2007, the federal

government contributed RUB 550 billion to the state corporations (10% of total budget

expenditures). State corporations can borrow in foreign and domestic capital markets and

issue bonds. Their loans are often guaranteed by the government. They can also co-operate

with the private sector in public-private partnerships. It is very important that the legal

status of the state corporations is clarified and that legal measures are taken to prohibit

new quasi-fiscal activities of these corporations.


BUDGETING IN RUSSIA

2.2. Budget formulation process

The present section will describe the budget preparation procedure in its present

form, after the enactment of the Budget Code revision of 2007 which introduced the three-

year budget. This procedure was followed for the first time in 2007 for the budget

for 2008-10. Because of the upcoming Duma elections, the 2008-10 budget was presented

to the Duma on 26 April 2007, whereas the (normal) deadline is 26 August. In other words,

the present budget preparation procedure (at the time of this review) has only been tested

once, and the timetable for 2007 deviated from the timetable prescribed in the Budget

Code.

The new budget formulation procedure is divided into two distinct parts. First, there is

a technical update of the estimates for the upcoming budget year and the first out-year as

contained in last year’s budget37 and the addition of current policy estimates for the

second out-year. The second part involves the distribution of the pre-set envelope for new

spending in the budget year (with consequences in the out-years) and the setting of the

new spending envelopes for the new out-years.

Table 5 shows the budget formulation calendar with the regular completion dates as

well as the completion dates that were applied in 2007 (at the time of this review).

2.3. Macroeconomic estimates

The Macroeconomic Forecast Department of the Ministry of Economic Development

and Trade is in charge of developing initial macroeconomic forecasts as well as monitoring

the current status of the economy. As a rule, this department produces four forecasts per

year. In a normal year (not during the preparation of the 2008-10 budget), an early forecast

is produced in April and the forecast used for budget preparation is developed in June. The

latter is updated and specified for industries and regions in August. The final version is

produced in December, taking into account the latest data on economic development

during the current year and the approved Federal Budget. The versions of April and August

are published. The versions of June and December are working documents for budget

preparation and implementation. Forecasts are derived from economic models that are

partly based on econometric estimation. Third-party research is taken into account, for

instance, forecasts of economic research institutes and banks.

The Ministry of Economic Development and Trade decides about the macroeconomic

forecasts that go into the budget. These assumptions have to be agreed with the Central

Bank of the Russian Federation and approved by the Budget Commission, which also

resolves any disputes about the assumptions between the ministries. The Budget

Commission consists of the Minister of Finance, the Minister of Economic Development

and Trade, the Minister of Industry and Energy, the Minister of Defence, the Minister of

Education, the Minister of Health Care and Social Development, and the Chair of the

Budget Committee of the State Duma. Other ministers can be invited to the meetings of the

Budget Commission if matters concerning their portfolio are being discussed. The

Commission is chaired by the Prime Minister. He organises the Commission’s activities and

monitors the implementation of its decisions. The tasks of the Commission include the

review of:

● the medium-term economic scenarios;

● the macroeconomic assumptions for the upcoming budget;


BUDGETING IN RUSSIA

● the draft of the Federal Budget, including the medium-term financial policy and the

financial balance;

● the proposals for changes in the tax and customs legislation;

● the proposals concerning public debt policy.

All recommendations of the Budget Commission are submitted to the government for

approval.

2.4. Technical updating

The budget formulation process starts with the “Draft Budget Schedule” of the

Ministry of Finance detailing guidelines for budget submissions and the timetable for

negotiations and meetings of the Budget Commission and the government. The Draft

Budget Schedule must be agreed with the Ministry of Economic Development and Trade

and the Ministry of Health Care and Social Development and adopted by the Budget

Commission. Subsequently the Ministry of Finance sends out the Budget Circular which

Table 5. Budget formulation calendar

Regular time schedule according to law

Activity completedTime schedule applied in 2007, for the 2008-10 budget

February-March Formulation and approval by the Budget Commission of tax and customs policy (January). February-March

April-May – (Early) macroeconomic forecasts.– Decision on macroeconomic assumptions by the Ministry of Economic Development and Trade.– Technical calculation of ministerial baseline targets for upcoming budget law, i.e. adjusting

estimates of the previous budget law for the coming three years, by the Ministry of Finance for current expenditures and by the Ministry of Economic Development and Trade for capital expenditures and current expenditures included in investment programmes.

– Line ministries receive Budget Circulars with baseline targets from the Ministry of Finance (current expenditures) and the Ministry of Economic Development and Trade (capital expenditures and current expenditures included in investment programmes).

– Approval by the Budget Commission and the government of the main directions of budget policy, including adjustment of entitlement legislation, new spending priorities and use of the oil and gas transfer in the upcoming three-year budget.

June-August – Line ministries allocate their baseline targets for 2008-10 among their Main Budget Fund Administrators, further to be called main budget holders (responsible for the line items of the budget).

– Ministries present their proposals for baselines to the Ministry of Finance (current expenditure) and the Ministry of Economic Development and Trade (capital expenditures and current expenditures included in investment programmes).

– June Economic Forecast (only in the regular time schedule).– Approval by the Budget Commission and the government of baselines (technical update).

– Decision of the Budget Commission and the government on the size of envelopes to be distributed and the size of envelopes in out-years to remain undivided.

– Targets for new spending set by the Budget Commission and the government and sent to ministries; negotiations with ministries.

– The Ministry of Finance and the Ministry of Regional Affairs discuss methods of grants to regions and local governments and decide mandate for negotiations between the Russian Federation and the regions for grant spending.

– Ministerial budgets for three years (including investments) decided by the Budget Commission and the government.

– The Ministry of Finance drafts the three-year budget law.– Ministries draft their “Reports on Results and Activity” and submit them to the Ministry of Finance,

the Ministry of Economic Development and Trade and the Commission for Budget Expenditure Efficiency Improvement.

– The government approves the draft budget law and the draft laws about the budgets of the State Pension Fund, the Social Insurance Fund and the Federal Mandatory Health Insurance Fund for 2008-10.

April

26 August The government submits the budget to the Duma. 26 April


BUDGETING IN RUSSIA

contains ministerial targets for the updating exercise – basically the ministerial totals of

the first out-year estimates of the previous budget, corrected for inflation (the Ministry of

Economic Development and Trade issues a similar circular for capital expenditures). The

deflators used may not always reflect the real price development of the ministry’s inputs.

Subsequently, estimates are updated by the main budget holders in line ministries. The

estimation base is current policy. Entitlement estimates are updated on the basis of the

latest estimates of eligible claimants over the three-year period of the budget. Limited

reallocation within ministries is possible during the technical update for reasons listed in

the Budget Circular. Finally, during the technical update estimates for the new second out-

year are made, also on the basis of current policy.

The results of the technical update are collected and reviewed by the financial

directorate of each line ministry, and discussions are held between the responsible

department of the Ministry of Finance (the Ministry of Economic Development and Trade

in the case of capital expenditure) and the line ministries. (For the organisation of the

Ministry of Finance, see Box 3.)

Tax-revenue estimates are based on the latest macroeconomic forecasts and current

tax policies. These may include changes in fiscal legislation that have been approved by the

government and that will be submitted to Parliament in advance of the submission of the

budget.

On this basis, the Ministry of Finance drafts the baseline targets of the Federal Budget

for the coming three years, split out by ministry and by extra-budgetary fund. The baseline

targets are presented to the Budget Commission, followed by government approval.

2.5. New funds allocated

The second stage starts with a decision by the Budget Commission and the

government about the size of the envelopes for new spending in the budget year and the

out-years. For the budget year and the first out-year, these envelopes may in principle be

held at their previous levels or be expanded with room that may become available from

new revenues. The envelope for the second out-year has to be determined in the light of

the expenditure baselines and revenue estimates. The envelope for the budget year is up

for distribution.38 Any new spending in the budget year will work through to the out-years

Box 3. Organisation of the budget process in the Ministry of Finance

The budget preparation process is anchored in the Budget Policy Department of theMinistry of Finance which consists of four divisions: Resource Funds; Budgetary Reform;Budget Execution Methodology; Budgetary Accounting, Reporting and Classification. Thedepartment has 24 staff including the director and five deputies. The negotiations with theline ministries about estimates and new spending are conducted by four sectoraldepartments within the Ministry of Finance: Industry; Social Affairs and Science; State,Military and Law Enforcement Services; State Administration, Judiciary, State andMunicipal Services. The areas of responsibility are at present not aligned with ministerialportfolios. For reasons of efficiency, the boundaries between the four sectoral departmentswill be revised in order to correct this. It is estimated that altogether about 500 people areinvolved in the budget process in the Ministry of Finance and the Ministry of EconomicDevelopment and Trade.


BUDGETING IN RUSSIA

and will limit the undivided envelopes in the out-years. The aim to keep the undivided

envelope in the out-years at a certain size may have consequences for the way the

envelope in the budget year is spent (no camel noses). During the preparation of the

2008-10 budget, the undivided envelopes for the first and second out-year were set at 2.5%

of budget expenditures (2009) and 5% of budget expenditures (2010).

The Budget Commission and the government decide on the ministerial targets for the

new spending initiatives and the split in these targets between current and capital

expenditures. Subsequently, line ministers, supported by their financial directorates,

develop their own new spending proposals (see Box 4 for the internal process in a line

ministry). Then a process of negotiations begins between the line ministries and the

Ministry of Finance (Ministry of Economic Development and Trade in the case of capital

expenditure). Discussions focus on new expenditures but may also involve reallocations

larger than allowed in the technical updating exercise. Agreement must be reached about

the following issues:

● The total amount and profile of new spending initiatives.39

● Amendment of expenditure limits (ministerial totals) for the budget year and the first

out-year.40

● The expenditure limit (ministerial total) for the second out-year.41

● Funds to be reserved for the national priority projects.42

Box 4. Budgeting in the Ministry of Culture and Media

The Minister of Culture and Media is responsible for the ministry and its agencies*including the Bolshoi Ballet, the Hermitage Museum and the National Film Archives. Theministry’s budget is developed in the Economic and Financial Department, which has astaff of 40. This department includes separate units for medium and long-term budgetprospects (six staff), targeted programmes (six staff), accounting (six staff) and internalcontrol (six staff).

As discussed above, there is a split between the technical updating of the currentappropriations and the distribution of the envelope for new initiatives. In 2007, theMinistry of Finance handed out the budget targets for the updating exercise in February(normally this would be in April, see Table 5). The targets were then transmitted to thebudget holders within the ministry. The targets are basically the same as the previousyears’ estimates for the out-years, after indexing according to the consumer price index.Budget holders then put up their own estimates, both for the updating exercise and fornew spending initiatives. The Economic and Financial Department collects the proposals.In general, the ministry will only take over a limited number of proposals for newinitiatives. During the budget preparation process, there will be discussions with theMinistry of Finance first concerning the updating of estimates and next on the costing ofthe new initiatives. These discussions will typically reach the political level one or twotimes per year. New spending initiatives have to be approved by the Budget Commissionand the government.

There is not yet a budget preparation IT system in the Ministry of Culture and Media. Thebudget is produced by sending spreadsheets to the Ministry of Finance. The Ministry ofFinance produces the budget documents and the appropriations tables.

* For the concept of agency, see Section 4.5.


BUDGETING IN RUSSIA

If issues cannot be resolved bilaterally between the line ministry and the Ministry of

Finance, they are submitted to the Budget Issues Sub-Commission of the Budget

Commission chaired by the Minister of Finance (for capital expenditure: Economic Issues

Sub-commission of the Budget Commission, chaired by the Minister of Economic

Development and Trade). The outcomes of the reviews conducted by the Sub-Commission

are formalised in a memo and submitted to the Budget Commission which makes the final

decisions or submits political issues to the government.

The purpose of the Budget Commission is to resolve most of the issues up to a certain

political threshold. However, the process is in reality less clear, as ministers may find ways

to circumvent the process in order to further their budgetary interests. This can take the

form of attempts to solicit favourable decisions from the Prime Minister or the Minister of

Finance outside the Commission process (after which this process can be ignored). The

process could be improved and made more efficient if the Budget Commission would focus

more clearly on technical matters (macroeconomic assumptions, the updating exercise

leading to the baselines, revenue estimates, the size of the undivided envelope in the out-

years) and leave political matters (the distribution of the spending envelope over ministries

and new spending initiatives, major reallocations) to the government. In this way, the

Budget Commission could probably be “depoliticised” to a certain extent. If such a reform

would be considered, the composition of the Commission could also be examined. Various

OECD countries work with a financial-economic core cabinet; apart from the prime

minister, the minister of finance and the minister of economic affairs, often the minister

of social affairs (responsible for the labour market and social security) and the minister of

the interior (responsible for the financing of sub-national government) participate in such

a group, but typically not the minister of defence nor the minister of education who have

large sectoral spending interests.

Until 2008, the budget formulation process in Russia was split between appropriations

for current expenditure, co-ordinated by the Ministry of Finance, and appropriations for

capital expenditure co-ordinated by the Ministry of Economic Development and Trade. This

split also involved an early decision on the share of investment in the envelope for new

spending coming up for distribution. During the preparation of the budget for 2008-10, 15%

of the envelope was earmarked for capital expenditure. Although this split exists in various

countries, in OECD countries it no longer occurs (Turkey being an exception). The Russian

government has very recently decided to transfer the supervision of capital spending from

the Ministry of Economic Development and Trade to the Ministry of Finance. This decision

should lead to a less fragmented budget process, improved linkage between capital and

current expenditures, and a better trade-off between public services. It seems logical that

this decision will also have consequences for the budget circular (no separate budget

circular any more for capital expenditure), the budget requests for baselines and new

spending initiatives (no separate requests any more to the Ministry of Development and

Trade) and the functioning of the Budget Commission (no longer a separate Economic

Issues Sub-Commission).

Concentration of financial supervision in the Ministry of Finance is an important step

forward but is not sufficient for a good linkage between current and capital spending. For

that purpose it is necessary that each line ministry has authority over the capital

expenditures that are immediately relevant for its mandate (and its current expenditures).

That is presently not the case. The reason is mainly historical, in particular the

development of various types of “targeted programmes” which are administered and


BUDGETING IN RUSSIA

funded in processes that are not well integrated in the regular budget process.

Furthermore, the Investment Fund (see Section 1.2) creates additional fragmentation of

investment planning.

There are four types of targeted programmes at the federal level: “Federal Targeted

Programmes” (FTPs), the “Federal Investment Targeted Programme” (FITP), “Departmental

Targeted Programmes” (DTP) and “Long-Term Targeted Programmes” (LTP). FTPs were

meant for large-scale investments and scientific programmes. The Minister of Economic

Development and Trade is responsible for their administration and budget. FTPs often

lacked effective management mechanisms and were not well co-ordinated with the

responsible ministries. Their number has been reduced from 149 in 2004 to 50 in recent

years. The FITP compiles information on budget investments in FTPs but also other

(related) investment projects. The Minister of Finance is responsible for the budget of the

FITP while the Minister of Economic Development and Trade is responsible for the

selection of projects. Investment projects included in the FITP with a budget of over

RUB 8 billion are reflected in the budget in a separate line item (for the budget

classification, see Box 6 below). Smaller investment projects will be reflected in aggregate

line items. DTPs are investment programmes administered and funded by line ministers.

LTPs are a new form of investment programming that will be introduced as of 2009. LTPs

are also administered and funded by line ministries but they will be reflected in the budget

as separate line items (because of their size and importance).

The Investment Fund is not well integrated in the budget process and not linked with

current expenditures required for project implementation. The tools for using the Fund’s

resources are not properly developed and do not allow prioritising of the projects. This

results in under-exploitation of the Fund’s resources and accumulation of its reserves. At

the same time, it is expected that by 2010 the Fund’s resources will not be sufficient for the

implementation of large-scale projects to be undertaken.

It is recognised by the Russian authorities that the present processes for investment

planning are complicated and not well co-ordinated with the budget process. Separate

planning of capital expenditure and related current expenditure (for maintenance,

exploitation, etc.) has led to negative consequences such as uncompleted construction

projects, prolongation of construction terms, and high exploitation costs of completed

projects. For the future, it is important that investment planning is entirely integrated in

the regular budget process of the line ministries that are responsible for the relevant policy

sector. Such integration requires that the Minister of Transport has authority over

infrastructure, the Minister of Defence over weapon systems, the Minister of Urban

Development over public housing, etc. If Russia wants to go this way, it is recommended to

simplify the investment planning procedures. OECD countries usually have only a single

sectoral planning document for the medium and long term, for instance for transport,

defence, water resources, etc. This document treats both capital and current expenditure

and the resulting performance in a fully integrated way. It is entirely under the authority of

the sectoral minister. This minister is also responsible for the administration and funding

of all investment projects in his/her sector. Possibly the Long-Term Targeted Programmes

(LTPs) that are foreseen in the amended Budget Code can evolve into this type of document,

but this would require a considerable simplification and clean-up of the remaining

procedures and institutional setup. In a transition period, it may be useful to maintain a

“light” form of co-ordination in the Ministry of Economic Development and Trade, for

instance by way of a “knowledge centre” that can perform cost-benefit analysis on project


BUDGETING IN RUSSIA

proposals and provide line ministries with advice about technical aspects of investment

projects. The need for the Investment Fund which, apart from the mentioned problems,

does not function properly and is too small for the projects for which it has been

established, should be reconsidered.

The financial directorates of the line ministries play a key role in the budgetary

process. These directorates are also a crucial factor in any policy to improve the efficiency

and effectiveness of public spending and to enhance budgetary control. Financial

directorates must be able to co-ordinate the budget process inside the line ministries and

to provide countervailing power to the budget holders of the ministry. At present, the

financial directorates of a number of line ministries fulfil a more traditional bookkeeping

role. The Russian Ministry of Finance has taken initiatives to improve the capacity of

financial directorates. These initiatives should be pursued energetically. Training

programmes and international exchange can be useful tools for this purpose.

2.6. Performance and the budget preparation process

Since 2004, budget holders annually compile reports on targets and results in their

main areas of responsibility. These reports are integrated by the Minister of Economic

Development and Trade into an annual report on targets and results of the government.

The report contains strategic goals elaborated in measurable targets and time series data

on the relevant indicators for all sectors of federal policy. For instance, the strategic goals

for the Ministry of Finance are: creating and implementing the budget, effective

management of state liabilities, good tax management, and macroeconomic stability in

Russia. Target indicators include the credit rating of federal bonds, several inflation

indicators, etc. The general report is published.

Parliament does not receive the performance reports (nor the ministerial report nor

the general report) and these are not attached to the budget documentation. These results

are rather considered by the government Commission on Evaluation of Effectiveness of

Federal and Regional Executive Authorities. Assessments are also conducted by the

Ministry of Economic Development and Trade and the Federal Statistics Office. So far, data

on results hardly play a role in the budget process.

The role envisaged for performance information in the future is not entirely clear.

However, the procedures are very new. At present, the main role of performance

information is transparency: to show what outputs are being produced in the public sector.

On this basis, a more evidence-based debate with Parliament and civil society about the

merits of current policies becomes possible, and ministers can better be held to account.

However, the role of performance information in sectoral policy development is different

than in the budget process. In OECD countries, there are widely different approaches

concerning the role of performance in the budget process. Some countries that in the past

have published large amounts of performance information in the budget documentation

have made steps back and have now largely relegated this information to sectoral policy

documents (for instance, Australia, the Netherlands, New Zealand, the United Kingdom).

For Russia, it is important to clarify the role performance information should play in the

budget process, if any, before further steps are taken to publish large amounts of such

information in the budget documentation (as opposed to sectoral policy plans). Otherwise

there is a real risk that the transparency of the budget documentation is impaired rather

than enhanced by such information.


BUDGETING IN RUSSIA

2.7. The President’s Budget Address

Formally the role of the President in the budget process is limited. However, there are

counsellors in the Administrative Office of the President for every ministry, including the

Ministry of Finance. Counsellors are generally kept informed about the progress of the

budget process by line ministries, and they may work with the counsellors for the Ministry

of Finance and the Prime Minister in order to provide advice to those two ministers.

The President plays a formal role during the President’s Budget Address to the Duma

in May (also in May 2007, in spite of the compressed time schedule). This address precedes

the actual submission of the budget and highlights the budget features that the President

wants to emphasise. In the 2007 budget address, much emphasis was put on the need to

measure and control performance. Also the President exposed many of the strategic goals

of the government in the areas of national priority projects (health, education, housing,

agriculture) but also in areas like pensions, public sector salaries, infrastructure and

defence.

2.8. Conclusion

The recent revision of the Budget Code in Russia has introduced three-year budgets,

strict fiscal rules and considerable constraints on extra-budgetary activities of government

units and public enterprises. This amounts to large progress in the control of public

spending.

Three-year budgets provide predictability of public spending, allow line ministries to

conclude multi-annual contracts and plan on the medium term, and oblige budgetary

authorities to consider the multi-annual consequences of spending initiatives. Potential

risks in a situation of less buoyant revenue growth are that three-year budgets lock in

expenditures and that large reallocations and expenditure cuts become impossible.

Although the rules of the Russian Budget Code seem to allow some changes in estimates

for existing programmes, this possibility seems to undermine the very idea of three-year

budgets. Improvement on this point could be achieved by clarifying the rules about

revision. In particular, the rules could be sharpened so that it becomes clear that

reallocations within and between ministries are possible, but only under the strict

condition that the total of federal expenditures on existing programmes (excluding the

undivided envelope), as established in the budget of the previous year, is not exceeded.

This condition could explicitly be stated in the Budget Code and would imply that the

possibility of retrenchments and large reallocations is explicitly recognised. On the other

hand, it would mean that certain motives for revision that are now admitted, such as

overspending on mandatory spending programmes without compensation, would be

prohibited.

The new fiscal rules are strict and assure sound fiscal management in Russia. The new

rules for the Oil Stabilisation Fund are prudent, insure the government sector against the

volatility of the markets for hydrocarbons, provide for intergenerational equity, and fulfil

an important role in monetary policy.

Since the new fiscal rules steer the non-oil balance and allow for extension of the

envelope for new spending beyond the undistributed envelope of the previous budget in

the light of additional windfall revenue, they cannot be seen as expenditure rules. The

Russian authorities may consider moving to an expenditure rule, possibly after some years

of experience with the three-year budgets. This could be done by removing the


BUDGETING IN RUSSIA

requirement on the non-oil balance and by simultaneously excluding the possibility of

extending the envelope for new spending beyond the undivided envelope of the previous

budget. Of course there is then still a need to anchor the requirement on total spending in

a target for the budget balance, but this is a medium-term target and the actual balance is

allowed to fluctuate from year to year and “breathe with the economy”.

The efforts of Russia to remove off-budget spending in the government sector are

impressive. The main remaining problems concern the integration and consolidation of

the expenditures and revenues of state unitary enterprises (insofar as they are not

transferred to the market sector) and the commercial activities of regional and local

governments. It is important that efforts to tackle these problems are continued and

brought to completion.

The efforts of Russia to terminate quasi-fiscal spending by public corporations in

which the Russian Federation holds a stake are also impressive. However, much remains to

be done, especially in the energy sector. In a first stage, this does not necessarily require an

overhaul of the existing regime of price regulation, but rather the introduction of explicit

budget subsidies to the energy sector, possibly accompanied by a revision of the tax regime

in order to achieve budget neutrality.

The success of budget reform in the Russian Federation is to a large extent based on

the elimination of quasi-fiscal operations of state unitary enterprises and publicly owned

joint stock companies and the shift toward more transparent ways of providing public

services. Against this background, the recent introduction of a new type of unit, namely

that of “state corporations”, is a reason for concern. It is very important that the legal

status of the state corporations is clarified and that measures are taken to prohibit new

quasi-fiscal activities of these corporations.

The role of the Budget Commission is not entirely clear. The functioning of the

Commission may be improved by limiting its mandate to technical aspects of the budget,

such as the review and approval of the macroeconomic assumptions, the baselines and the

revenue estimates. Other more political aspects of the budget could be submitted directly

to the government.

The decision to transfer the supervision of capital spending from the Ministry of

Economic Development and Trade to the Minister of Finance should lead to a less

fragmented budget formulation process, improved budgetary control and better trade-off

between public services.

The Russian authorities may consider taking a further step, and transfer capital

spending that is immediately relevant for current expenditures to the budgets of the

ministries concerned, while maintaining a light form of co-ordination in the Ministry of

Economic Development and Trade. In this connection, it is recommended that the present

planning procedures for various kinds of “targeted programmes” are simplified. A single

sectoral planning document under the ministry that is responsible for the policy area

would suffice. This document must cover both capital and current spending. Possibly the

Long-Term Targeted Programme, foreseen in the recent amendment of the Budget Code,

could develop into such a document. The Investment Fund, which causes further

fragmentation, does not function properly and is too small for the projects for which is

established, should be reconsidered.


BUDGETING IN RUSSIA

The Russian Ministry of Finance has taken initiatives to improve the capacity of

financial directorates. These initiatives should be pursued energetically. Training

programmes and international exchange can be useful tools for this purpose.

Russia has made large efforts to develop performance information about public

spending programmes. So far, performance information is not part of the budget

documentation that is submitted to the State Duma. This is a prudent approach that is

consistent with the developments in other OECD countries. For Russia, it is important to

clarify the role that performance information should play in the budget process, if any,

before further steps are taken to publish large amounts of such information in the budget

documentation (as opposed to sectoral policy plans). Otherwise, there is a real risk that the

transparency of the budget documentation is impaired rather than enhanced by such

information.

3. Parliamentary approval

3.1. Budget submission

According to Art. 105 of the Constitution of the Russian Federation, federal laws have

to be adopted by the State Duma and approved by the Council of Federation. This also holds

for the annual budget law.43 According to Art. 114 of the Constitution, the government

submits the budget law to the State Duma. The right of initiative, including amendment,

on the part of the Parliament is granted in Art. 104 of the Constitution and further

elaborated in the Budget Code.

The Budget Code explicitly embraces the principle of openness, mandating the

government to publish the approved budget law and budget execution reports and to make

this information available to the legislative bodies at all levels of government (Art. 36).

In addition, the Budget Code enumerates an extensive set of documents that must be

submitted in conjunction with the budget bill (Art. 192, par. 4 and 5). This includes:

● the draft budgets of the extra-budgetary funds;

● preliminary results of socio-economic development during the year preceding the

budget year and forecast of socio-economic development over the planning period (of

three years including the budget year);

● preliminary budgetary results over the year preceding the budget year;

● main directions of budget and tax policy over the planning period;

● an explanatory note on the budget and fiscal policy over the planning period;

● the sources of deficit financing in the budget year and the planning period;

● a list of commitments for the budget year and the planning period;

● an explanation of the financing of the regions by federal means and tax-sharing

arrangements in the budget year and the planning period;

● reports on the implementation of federal targeted programmes;44

● the upper limit and structure of federal debt in the budget year and the planning period;

● a draft programme of federal loans, including export loans, in the budget year and the

planning period;

● a draft programme of borrowing in the budget year and the medium term;


BUDGETING IN RUSSIA

● an upper limit on federal guarantees at the end of the budget year and at the end of the

planning period;

● calculations of the use of the federal oil and gas revenues in the budget year and the

planning period and the assets of the Reserve Fund and the Prosperity Fund at the end

of the budget year and the end of the planning period.

Changes in tax legislation are debated and decided before the submission of the

budget bill. Since the Tax Code requires that each law establishing new taxes or fees is to

come into force not earlier than 1 January of the year following the year of its adoption and

not earlier than one month before its official publication (Art. 5 of the Tax Code), the

budget can be based on firm assumptions concerning the revenue side (tax changes cannot

be implemented during the budget year if they have not been adopted in the previous

budget year).

3.2. Parliamentary procedure

The Budget Code states that the government is to present the budget bill to the State

Duma not later than 26 August (Art. 192). The Federal Assembly is given up to 99 days to

review the budget bill; this period is subject to a rather tight budget calendar. The State

Duma considers the budget bill in three readings. The Council of Federation considers the

budget in one reading.

The timetable prescribed by the revised Budget Code of 2007 has shortened the

parliamentary procedure (see Table 6). Whereas in the period 2001-07 the procedure took

place in four readings and took from 104 to 123 days, in 2007 it took only 86 days to pass the

budget law for 2008-10. The new timetable will guarantee that the new budget is in place at

the beginning of the budget year, which is a clear improvement.

According to the Constitution and the Budget Code, Parliament has the right to amend

the draft budget law submitted by the government. However, changes in the revenues or

the deficit and hence in the totals of expenditures require the agreement of the

government (Art. 201 of the Budget Code).

Amendments can be put forward in the State Duma by the “subjects of legislative

initiative”, namely the President of the Russian Federation, the government, the Council of

Federation and its members, and the members of the State Duma. In addition, the regions,

the Supreme Court, the Constitutional Court and the High Arbitrage Court can put forward

Box 5. The Russian Parliament

Russia’s Federal Assembly – the representative and legislative body of the RussianFederation – is structured as a bicameral Parliament. The lower house is called the StateDuma. It comprises 450 members, each elected for a period of four years through a systemof proportional representation. At present there are four factions registered in the StateDuma (5th convocation, 2008-11): United Russia (315 members), Communist Party(57 members), Liberal and Democratic Party (40 members), Righteous Russia (38 members).The upper house is the Council of Federation. It comprises 170 members. The members ofthe Council are elected by the regions. Each region is represented by two members: one iselected by the legislative body of the region and one is appointed by the government of theregion with the approval of the legislative body.


BUDGETING IN RUSSIA

amendments in the area of their competence. All amendments must be considered by the

State Duma (Art. 104 of the Constitution).

The first budget reading deals with the budget aggregates: totals of revenues and

expenditures and the balance. If the State Duma rejects the aggregates, it has three options

(Art. 202 of the Budget Code): i) submit the budget bill to a reconciliatory commission of

representatives from the State Duma, the Council of Federation and the government in

order to reach agreement; ii) send the draft budget law back to the government with the

request to submit an amended draft; and/or iii) call for a vote of confidence in the

government. Ultimately an amendment of the aggregates must be agreed by the

government. Once the totals are approved, the aggregates cannot be changed in the

following parliamentary hearings.

The second reading of the State Duma deals with the functional expenditures totals

and a number of specific issues (see Table 5 above). This reading is prepared by the

Committee on Budget and Taxes of the State Duma (consisting of 45 members). The

Committee first collects the amendments proposed by the subjects of legislative initiative

and groups them for discussion in the relevant sectoral committees. The decisions of

sectoral committees are then collected and combined by the Committee on Budget and

Taxes into an opinion, which is voted on by the State Duma. Some amendments can only

be considered by the State Duma with the agreement of the government, namely those

regarding expenditures for federal targeted programmes, investments in state property,

and grants to sub-national governments and to some specific public corporations.

During the third reading in the State Duma, expenditures are presented according to

line items, and the members of the Duma vote on the draft budget law as a whole. The vote

leads to approval or rejection, and no further amendments can be made. This third reading

provides the final vote on the budget. The State Duma can reject the budget as a whole at

this stage, and send it to the reconciliatory commission for review.

Table 6. Parliamentary budget calendar

Until 26 August Submission to the State Duma of the draft federal budget law by the government.

Within 30 days after submission (not later than 25 September)

First reading leading to approval of the totals of expenditures and revenues and the balance.

Within 35 days after first reading (not later than 30 October)

Second reading leading to approval of the totals for ministries and agencies, financing sources of the deficit, totals for the expenditure functions,a transfers to extra-budgetary funds and sub-national governments, the programme of federal loans, the programme of borrowing, the programme of guarantees and the expenditures for each of the targeted programmes (see the paragraph on targeted programmes in Section 2.5 above).

Within 15 days after second reading (not later than 14 November)

Third reading, leading to approval of the line-item estimates and thereby of the draft budget law as a whole.

Within 5 days after third reading (not later than 19 November)

Submission of the federal budget law as approved by the State Duma to the Council of Federation.

Within 14 days after submission (not later than 3 December)

Single reading in the Council of Federation leading to approval or rejection of the federal budget law.

Within 5 days after single reading (not later than 8 December)

President’s signature.

a) The line-item classification of the budget consists of about 3 800 appropriations and is hierarchically ordered. Thesecond-highest ordering is a functional classification that is comparable in level of aggregation to the second-levelCOFOG classification (Classification of Functions of Government) of the international accounting standards (butnot entirely identical). For the Russian budget classification, see Section 4 below.


BUDGETING IN RUSSIA

Apart from the formal procedure of three budgetary readings described above, an

additional informal procedure has been established in the last few years. It is known as the

“zero reading” in which representatives of the Ministry of Finance present the budget

outline to representatives of the factions of the State Duma and the Council of Federation,

approximately one week before the draft is officially submitted to the Federal Assembly.

This reading seems to have come into use with the purpose of “testing the waters” before

the budget is actually submitted, and makes it possible to make last-minute adjustments.

Once the draft budget law is approved by the State Duma, it is submitted to the Council

of Federation. Like in the third reading of the State Duma, this reading is also carried out as

a review of the entire budget and cannot lead to amendments. The Council of Federation

has the right to approve or reject the budget. If the budget law as approved by the State

Duma is rejected by the Council of Federation, it will be submitted to a reconciliatory

commission.

While the State Duma has not yet ever held a public hearing about the budget, the

Council of Federation has conducted one public hearing on the budget every year

since 2001. These hearings take place in the middle of September, which is after the

submission of the draft federal budget to the State Duma and during the preparations for

the first reading of the State Duma. While this public hearing is open to the public, it is

attended mostly by government officials, the accredited press, and invited public finance

experts. The hearing is conducted in the form of speeches and there is virtually no

discussion.

The President has the right to reject the budget law as approved by the Federal

Assembly. In this case, too, the law would be submitted to a reconciliatory commission.

And in this case, the commission would additionally comprise the representatives of the

President.

Since 2000, when the Budget Code entered into force, the budget law has never been

rejected by the Parliament. In the period 1995-99, the draft law was sent to a reconciliatory

commission in five cases, whereupon the modified version was approved. In 2007, the total

number of proposed amendments was 1 505, of which 553 were approved and 952 rejected;

the total amount of reallocation comprised in the approved amendments was

RUB 27.3 billion or 0.5% of total federal expenditures. The totals of expenditures and

revenues and the balance have never been changed in the final version of the budget law

approved by the Parliament as compared with the draft submitted to the State Duma.

The openness and transparency of the parliamentary budget process could be

improved by holding public hearings (not only in the Council of Federation but also in the

State Duma) and by organising these hearings in the form of an open debate between

experts. This would also make it more attractive for the mass media to report about the

hearings as well as about the subsequent plenary sessions.

In most OECD countries, the government does not interfere in Parliament’s control

over its own budget, as this is considered as a part of the separation of powers. The Russian

State Duma has insufficient control over its own budget and staffing. In particular, the

Committee on Budget and Taxes of the State Duma seems to have insufficient staff

capacity to enable its members to develop independent judgment on non-political aspects

of the budget, such as the quality of the macroeconomic forecasts, the accuracy of the

medium-term expenditure estimates and the reliability of the data that the government

puts forward in support of its new spending proposals.


BUDGETING IN RUSSIA

3.3. Amendments during the fiscal year (supplementary budget laws)

During the budget year, the Parliament is authorised to approve amendments to the

budget that are submitted by any subject of legislative initiative (Art. 213 of the Budget

Code). Other subjects than the government can only submit amendments if total revenues

are more than 10% higher than estimated in the current budget laws. The procedure

foresees that a federal supplementary budget law must be approved in three readings,

within 25 days. In recent years, from two to six supplementary laws have annually been

approved in this way. Most changes have been initiated by the government and some by

the State Duma. In 2006 and 2007, the government used this procedure to introduce

substantial expenditure packages during the budget year.

3.4. Conclusion

The Budget Code prescribes an open and transparent parliamentary budget process.

The Budget Code enumerates an extensive set of documents that have to be submitted in

conjunction with the annual budget bill. The Code prescribes a specific timetable for the

parliamentary budget procedure that provides sufficient time for scrutiny and

parliamentary initiatives. The Code contains constraints on amendments that serve to

protect budgetary discipline. Such constraints can also be found in many OECD countries.

The parliamentary timetable prescribed by the amendments of the Budget Code

of 2007 has led to a considerable shortening of the parliamentary procedure and is a clear

improvement.

The openness and transparency of the parliamentary budget process could be

improved, for instance by holding public hearings (not only in the Council of Federation but

also in the State Duma) and by organising these hearings in the form of an open debate

between experts.

The State Duma has little control over its own budget and staffing. The Committee on

Budget and Taxes could benefit from additional staff providing non-political expertise on

macroeconomic and budgetary issues.

4. Budget execution

4.1. Organisation of budget execution

Within 15 days after the budget has been approved and signed by the President, the

Ministry of Finance issues the “Consolidated List of Appropriations”. This document lists

all the line-item appropriations (about 3 800) of the federal budget and distributes them

among ministries.

Subsequently, ministries distribute the appropriations among main budget holders

and budget holders in the form of “commitment limits”. Each main budget holder is

responsible for one or more line-item appropriation(s) and each budget holder represents

a spending unit. The list of the federal main budget holders is established by the annual

budget law. For example, the Ministry of Education divides the appropriation for the

funding of universities into commitment limits for each university. All in all,

approximately 60 000 spending units receive funds from the federal budget.

The total sum of commitment limits cannot exceed the total sum of appropriations,

but ministries may set the commitment limits up to 10% lower than the appropriations


BUDGETING IN RUSSIA

authorised in the budget law and thus hold back money that can be used during budget

execution for reallocation.

Budget holders have to break down their commitment limits in terms of types of

inputs, such as salaries, procurement, investments and grants (an economic classification).

This breakdown is not part of the line-item classification of the budget law (see Box 6).

Until 2008, the breakdown in types of inputs had to be approved by the Ministry of Finance;

as from 2008, by the line minister.

Resources are made available in quarterly instalments of the commitment limits

broken down into types of inputs.

After budget holders have received their commitment limits, and the budget year has

started, they are free to spend under the limit. No prior approval of contracts is necessary.

When payments are due, the budget holder sends a payment order to the Treasury which

executes the payment. The Treasury checks the payment order against the commitment

limit and executes the payment if the commitment limit allows it.

Budget holders are responsible for internal financial control of their budgets (Art. 158,

par. 11 of the Budget Code). This control should ensure: i) the legal, effective and efficient

use of funds, and ii) the use of subsidies and subventions45 in accordance with the goals

and conditions set in the relevant laws and decrees. Main budget holders are entitled to

carry out inspections of subordinate budget holders and financial officers, including those

of state unitary enterprises.

Box 6. Classification of appropriations in the annual budget law

Line-item appropriations in the Russian annual budget law consist of three parts:administrative groups (three digits in the code of the chart of accounts); basic functionalgroups (four digits in the code of the chart of accounts); and targeted programmes andtypes of expenditures (ten digits in the code of the chart of accounts). The classificationgoes into more or less detail depending on needs. All in all, approximately 3 800 line itemsare specified according to this classification (each with a code number of up to 17 digits).

The administrative classification specifies line items according to groups of main budgetholders (ministries, agencies, services* and some other large organisations).

The basic functional classification is roughly comparable to the first and second level ofthe COFOG classification of the international accounting standards (Classification ofFunctions of Government): two digits for first level (section) and two digits for second level(sub-section).

The last part of the classification is a more specific functional classification (seven digitsfor targeted investment items and three digits for types of expenditures). It is aninstrument for the government and Parliament to keep track of funds for specific projects– for example, for all investment expenditure included in the Federal Investment TargetedProgramme (FITP) above RUB 8 million.

The economic classification (three digits) is not part of the line-item classification of thebudget. However, together with the code of budget accounts (six digits), it is part of theintegrated budgeting and accounting chart of accounts (each account characterised by acode number of up to 26 digits).

* See Section 4.5 below.


BUDGETING IN RUSSIA

All government entities and state unitary enterprises are subject to the Russian

procurement legislation (the Civil Code, the Federal Law on Procurement and some other

federal laws). Joint stock companies that are (partly) financed by subsidies do not have to

follow the prescribed procedures, but they may on a voluntary basis (see Box 7).

The Russian Treasury was set up in 1992. In 2004 it became a federal service

subordinated to the Ministry of Finance. The tasks and competences of the Treasury are

regulated in the Law on the Federal Treasury of 2004. The Treasury is represented in all

regions and in many local governments. All in all, it has approximately 2 200 local branches

and 50 000 employees.

The Treasury runs a Single Treasury Account for all levels of government, held at the

Russian Central Bank. The coverage of the Single Treasury Account for the federal

government has improved in recent years, and now approximately 99.9% of federal

spending (excluding state unitary enterprises) passes through the Treasury. The Single

Treasury Account serves for payments in roubles as well as in other currencies.

Spending units keep two sub-accounts in the Single Treasury Account, one of which is

used for fee-financed expenditures and the other for all other expenditures. Spending

units of sub-national governments still hold fee-financed accounts outside the Treasury

account, but this practice will be prohibited as from 2010.

4.2. Reallocation during budget execution

According to the revised Budget Code, rules for reallocation during budget execution

are different for discretionary and mandatory spending.46 For discretionary spending, the

general rule is that appropriations for each line item can be increased or decreased by up

to 10% by the line ministry with approval of the Ministry of Finance. All spending increases

must be fully offset by decreases. Furthermore, appropriations can be reallocated between

line items by the line ministry as required by institutional changes without limit, provided

that increases are fully offset by decreases. Finally, budget holders can reallocate between

input items (see Section 4.1 above) within an appropriation without limit after approval by

Box 7. Procurement

The Federal Law on Procurement came into effect on 1 January 2006. It created a uniformprocurement process for all levels of government and defined the entities that must usethe framework. The law aims to improve transparency and to promote fair competitionamong bidders.

The two agencies that bear the main responsibility for the procurement process are theFederal Anti-monopoly Agency and the Federal Treasury.

The tender process has one main threshold of RUB 60 000. Below this value, a so-calleddirect procurement contract can be concluded. This implies that the buyer can directlycontact a supplier without public tender procedure. Above the threshold, a public tenderprocess must be pursued. The law outlines four different tender procedures and specifiescriteria for their use. Complaints are directed to the Federal Anti-monopoly Agency ifcriteria or tender regulations are violated. In special cases of gross violation, complaintscan be directed to the regular criminal courts.


BUDGETING IN RUSSIA

the line minister. Under similar rules that applied until 2008, reallocations of these kinds

were very common and occurred on a daily basis throughout the federal government.

For mandatory spending, the general rule is that appropriations can be increased by

up to 5% in response to underestimated demand under the current entitlement law. These

increases must be offset by decreases in other appropriations or by revenue windfalls

(revenues in excess of the budget estimates). In general, under the revised Budget Code,

revenue windfalls (excluding oil revenues47) may, apart from offsetting increased

entitlement spending, only be used for the purposes of financing the deficit or repaying the

government debt.

Reallocations exceeding the limits for reallocation as mentioned in the previous

paragraphs require a supplementary budget law (see Section 3.3 above).

At present, spending units can carry over appropriations of any kind to future years

without limit with approval by the Ministry of Finance. According to the Russian Ministry

of Finance, there is at present a problem with underspending, which has led to large pools

of unused appropriations. It is suggested that frequent policy changes are a possible reason

for this phenomenon. As from 2008, with a longer three-year horizon in the budget and

less volatility in line-item appropriations, the Ministry of Finance believes that this

problem should be overcome.

A certain ambiguity prevails in Russia concerning the desirable level of detail in the

budget classification. On the one hand, the present classification is rather detailed (with

3 800 line items), but on the other hand the opportunities for reallocation during execution

are large. The strong parliamentary “powers of the purse” suggested by the detailed

classification turn out to be illusionary in view of actual reallocation practices. In this light,

the Russian authorities may consider moving to a more aggregate classification with not

more than 10 programmatic line items per ministry and not more than 200 line items in

total, as in a number of OECD countries.48 A programmatic budget classification can have

advantages from the point of view of priority setting and financial management, and will

probably bring savings on administrative costs.

4.3. Reserve funds

The annual budget law includes three reserve funds: the Reserve Fund of the

President; the Reserve Fund of the government; and the Emergency Reserve Fund of the

government. According to the Budget Code, the total appropriations for the reserve funds

must remain below 3% of total expenditure (Art. 81, par. 3).

The Reserve Fund of the President may not exceed 1% of total expenditure (or one-

third of the maximal total for the three reserve funds) and can be used discretionally by the

President through decrees. The Reserve Fund of the government can be used for a wide

range of purposes of a temporary nature, such as supporting voluntary organisations, top-

level meetings and other activities listed in the annual budget law and subject to decision

by the government. The Emergency Reserve Fund of the government can be used for

financial aid in case of disasters and emergencies as well as for preventive measures prior

to such events, at the discretion of the government.

4.4. Cash and debt management

At present, the Treasury does not conduct active cash management or short-term debt

management for the Russian government.49 Resources under the commitment limits are


BUDGETING IN RUSSIA

made available to the sub-accounts of the budget holders on a quarterly basis, and budget

holders are free to spend these resources as they see fit. At present, budget holders do not

provide cash plans to the Ministry of Finance or the Treasury. The Treasury makes cash-

need forecasts on the basis of its own information, mainly the spending patterns of

previous years. In the light of this information, it conducts short-term debt management

operations if the cash surplus becomes too large. According to the Treasury, under the

present regime budget holders always have sufficient cash balances in their sub-accounts

to meet expenditure needs. Although working properly from this point of view, the present

procedure leads to large idle cash balances during extended periods of time in many sub-

accounts of the Single Treasury Account.

The Treasury has developed a plan for the modernisation of cash management. The

plan is aimed at collecting better information from budget holders about the timing of their

cash needs. In particular, budget holders in charge of large investment projects will be

required to submit cash plans. This will enable the Treasury to diminish the cash balances

in sub-accounts of the Single Treasury Account and to have a more active short-term debt

policy.

4.5. Service delivery

Russia is a federal state, and many services are provided by the regions and local

governments rather than by the federal government. The expenditures of sub-national

government (regions and local governments) have been more or less stable in terms of GDP

since the year 2000 (around 14% of GDP), whereas the expenditures of the federal

government have slightly risen50 (from 14.1% in 2000 to 17.5% in 2007).

Table 7 shows total employment in the civil service by level of government. The civil

service excludes the military as well as non-administrative public employment (schools,

hospitals, etc.). These numbers include staff in core ministries working on policy

preparation and providing support services (legal advice, financial control, information and

communication technologies, etc.) other than service delivery. Sub-national government in

Russia is treated in Section 6 below. This sub-section will further focus on service delivery

by the federal government.

Table 7. Employment in the civil service by level of government in 2006Thousands of employees

Total employment in the civil servicea

Federal government 828.5

Federal level 42.5

Territorial (federal entities in the regions) 786.0

Regional government 241.5

Local governmentb 507.2

Total 1 577.2

a) The civil service includes administrative personnel employed in the general government sector; this does notinclude military personnel, doctors, teachers, policy personnel, and other non-administrative personnel.

b) At the local level, there is not a “civil service” in the proper sense. The number in the table includes officersholding elective posts in municipal bodies (members of elective municipal bodies), nominated officials of allranks, and specialists working on the basis of a labour contract.

Source: Rosstat (2008), Statistical Yearbook 2007, Rosstat, Moscow.


BUDGETING IN RUSSIA

In Russia, public satisfaction with the quality of public administration is very low. In

survey research, ordinary Russians give consistently bad scores to their public

administration. The bureaucracy is seen as not very client oriented, suffering from red

tape, and sometimes corrupt (OECD, 2006). These deficiencies are partly rooted in the

Soviet past but also in the slow pace of administrative reform in the 1990s.

Administrative reform has become a major priority since 2000. Priorities were listed in

a Presidential Decree of July 2003.51 They include: i) elimination of unnecessary functions

and duplicate work; and ii) the development of independent regulators for market sectors

susceptible to monopolistic practices and the organisational separation of policy making,

regulation and service provision.

Following up on the first priority, the government Commission on Administrative

Reform established under the Presidential Decree of 2003 undertook a review of over

5 000 functions of the federal executive branch. Based on this review, the Commission felt

that 800 functions were redundant, 350 functions were of a duplicate nature, and

500 functions were carried out at a too-broad scale. The results of this report were brought

to bear on the reorganisation of public administration that started in 2004.

As of March 2006, only a minor part of government functions which had been found to

be excessive in the report of the Commission on Administrative Reform had been

abolished or reformed. According to the Annual Report on the Results of the Socio-economic

Development of the Russian Federation in 2004 (Ministry of Economic Development and Trade,

2005, p. 95), the largest part of the excessive functions still exists. The reform process

seems to have stalled in the last two years, and the sense of urgency has been lacking.

Following up on the second priority in the Presidential Decree of 2003, the executive

branch of the federal government was reorganised in 2004.52 Federal offices were divided

into three types:

● Federal ministries are policy-making institutions. They perform policy analysis and

evaluation and are responsible for drafting new legislation. They supervise the activities

of federal services and agencies within their jurisdiction.

● Federal services are supervisory and regulatory bodies. They can take decisions with

external53 legal consequences in individual cases but they cannot make general laws or

decrees.

● Federal agencies are direct providers of public services to the state and/or private sector.

They are often partly funded by fees charged for their services.

The reorganisation aimed to separate policy making, service delivery and regulation of

the market sector. The separation was supposed to reduce the risk of conflict of interest

inside the executive branch of government and to improve controllability and

accountability of federal executive bodies. In practice, the reorganisation was carried

through in a formal sense; some federal entities were renamed as services and agencies

and gained some additional managerial autonomy. However, the division of functions was

only very imperfectly realised. Many services and agencies continue to make policy, and

many ministerial divisions are engaged in (administrative) execution rather than policy

making. Furthermore, there is still little indication that the Russian authorities are

comfortable with independent regulatory institutions, shielded from outside pressure, in

order to ensure the proper functioning of markets (OECD, 2006).


BUDGETING IN RUSSIA

At present, the executive branch of the Russian Federation consists of:

● Federal ministries under the authority of the President, and services and agencies under

the direct or indirect54 authority of the President (five ministries, some of which

supervise one or more services or agencies).55

● Federal ministries under the authority of the government, and services and agencies

supervised by those ministries (11 ministries, each of which supervises one or more

services and/or agencies).56

● Services, agencies and committees under the direct authority of the government (five

agencies; ten services; two committees).

In late 2005, the government approved an ambitious Concept for Administrative

Reform, to be implemented over the period 2006-08. This document is partly inspired by

the ideas of “new public management”. It puts much emphasis on performance

measurement, quality standards for public services, the rights and obligations of citizens

and officials concerning service provision, transparency, the autonomy of managers

concerning the input mix (procurement, contracting out, recruitment) and merit pay for

managers. The time schedule of the document planned for the reforms to be rolled out

over the period 2006-08, which is no longer realistic. The measures are mostly

commendable, provided that performance measurement remains to be seen as a tool for

sectoral policy assessment (not as a tool for budgetary decision making). A caveat is in

order concerning merit pay, where OECD experiences are rather mixed and where, in the

Russian context, risks for new forms of corruption are high.

Pensions, social insurance (against income loss due to unemployment or disability)

and health insurance are largely financed and administered by three federal extra-

budgetary funds (see Section 1.1 above). These funds are run on a pay-as-you-go basis

(benefits are not funded). Table 8 provides some data about the expenditures of the federal

funds (there are also mandatory health insurance funds at the regional level).

4.6. The public enterprise sector

The public enterprise sector at the federal level consists of federal state unitary

enterprises (see, however, the discussion in Section 2.1.3 above regarding their present

ambiguous position) and joint stock companies in which the Russian Federation has a

stake (Table 9).

Overall 411 000 state unitary enterprises and joint stock companies are (partly) in

regional/municipal ownership (as of 1 July 2007). Current legislation is aimed at providing

subsidies to enterprises that conduct quasi-fiscal activities by the delivery of goods and

Table 8. Federal extra-budgetary fundsIn per cent of GDP

Provisional outcomes Budget 2008-10

2007 2008 2009 2010

State Pension Fund 5.6 6.0 6.2 6.4

Social Insurance Fund 0.9 0.9 0.8 0.8

Federal Mandatory Health Insurance Fund 0.4 0.3 0.3 0.2

Total 7.0 7.1 7.3 7.5

Source: Federal Budget 2008-10.


BUDGETING IN RUSSIA

services below cost price. The authorities of regional and local governments, providing the

subsidies, must specify procedures and criteria in their regulations. These subsidies will

subsequently be compensated by federal grants. The total of subsidy grants in the federal

budget for 2008 amounts to 0.2% of GDP (1.3% of the federal expenditures).

In the case of public ownership, managers of commercial enterprises often have great

difficulty in separating the roles of entrepreneur and government representative. Within

the latter, the sub-roles of market regulator and fiscal authority can be distinguished. The

consequence is often that none of the roles is performed properly (the enterprise does not

maximise profits, engages in monopolistic practices and does not pay enough tax), to the

detriment of both the enterprise and the government. Although Russia continues to pursue

its privatisation policy concerning small and medium-sized state unitary enterprises and

joint stock companies, government acquisitions concerning (very) large companies have

increased in the last few years. Admittedly, it is harder to impose effective market

regulation and tax laws upon large firms than small firms, but ample evidence in OECD

countries shows that it is by no means impossible to design effective forms of regulation

for markets in which very large players operate. Nothing suggests that government

ownership is the optimal solution in these cases. In this light, the Russian authorities may

reconsider their privatisation policies of the last few years.

4.7. Human resource management

The general employment and minimum wage laws of Russia are also applicable to civil

servants. In addition, civil servants have further protection, giving them certain benefits

and guarantees. The minimum wage is established by federal legislation. Civil servants are

paid according to five different classes of employment based on professional group

(military personnel, judicial personnel, etc.). For some of these categories, allowances are

established based on education, academic degrees and titles. Within each class, the wage

Table 9. Federal state unitary enterprises and joint stock companies in which the Russian Federation has a stake

1 June 2006

IndustryState unitary enterprises Joint stock companies

Units Percentage Units Percentage

Non-market goods and services 1 817 25.30 356 9.60

Manufacturing industry, including: 1 624 22.60 1 772 47.60

Machine building industry 660 9.20 663 17.80

Light industry 187 2.60 27 0.75

Building material industry 55 0.75 53 1.40

Food processing industry 55 0.75 141 3.80

Metallurgic industry 30 0.40 101 2.70

Chemistry 34 0.50 98 2.65

Other manufacturing industries 603 8.40 689 18.50

Agriculture 913 12.70 363 9.70

Construction 752 10.50 380 10.20

Transport and communications 612 8.55 396 10.60

Forestry 53 0.75 99 2.70

Other industries 1 407 19.60 358 9.60

Total 7 178 100.00 3 724 100.00

Source: Institute of the Economy in Transition (2007), “Russian Economy in 2006 – Trends and Outlooks”, Institute ofthe Economy in Transition, Moscow.


BUDGETING IN RUSSIA

may consist of three parts: the base salary; class rank allowance; and fringe benefits, often

in kind. The wages of civil servants are set according to a scale consisting of 12 steps.

Civil servants are subject to a code of behaviour57 stating rights and responsibilities.

Civil servants must annually declare their assets and liabilities to the tax authorities (IMF,

2004).

Remuneration practices are not very transparent, mainly due to in-kind fringe benefits

such as housing facilities. Human resource management practices vary widely between

ministries, agencies and services. While some have modernised their rules for

recruitment, assessment and career development, others have not. Although central

policies aimed at imposing minimum standards are being developed, thus far they have

not been implemented.

4.8. Conclusion

Russia has successfully built up a modern Treasury organisation and brought all

government expenditures and revenues into a Single Treasury Account held at the Central

Bank. What remains to be done is the clarification of the situation of state unitary

enterprises (which are now excluded from the Single Treasury Account) and the integration

of entrepreneurial activities of sub-national government. The Ministry of Finance is

confident that these tasks will be completed in short order.

Russia has introduced a modern procurement law and has created transparent

procurement procedures, including possibilities for redress by appeal to an independent

administrative tribunal. The data provided by the Russian authorities about the use of

these procedures do not make clear how effective the procurement procedures actually

are.

The budget classification in Russia is rather detailed. On the other hand, the Budget

Code grants large opportunities for reallocation during execution. The strong

parliamentary “powers of the purse” suggested by the detailed classification turn out to be

illusionary in view of actual reallocation practices. In this light, the Russian authorities

may consider moving to a more aggregate classification with not more than

10 programmatic line items per ministry and not more than 200 line items in total, as in a

number of OECD countries. A programmatic budget classification can have advantages

from the point of view of priority setting and financial management, and will probably

bring savings on administrative costs.

The Treasury has developed a plan for the modernisation of cash management

in 2008. The plan is aimed at collecting better information from budget holders about the

timing of their cash needs. This will enable the Treasury to diminish the substantial idle

cash balances in the accounts of main budget holders in the Single Treasury Account of the

federal government and to have a more active short-term debt policy.

Administrative reform has become a major priority since 2000. Priorities include:

i) elimination of unnecessary and duplicate functions; ii) the development of independent

regulators for market sectors susceptible to monopolistic practices and the organisational

separation of policy making, regulation and service provision. Concerning the first priority,

as of March 2006 only a minor part of the unnecessary and duplicate functions identified

in 2003 had been abolished or reformed. The reform process seems to have stalled in the

last two years, and the sense of urgency has been lacking. Concerning the second priority,

the government reorganised the federal administration with a view to the separation of


BUDGETING IN RUSSIA

policy making, service delivery and regulation of market sectors. In practice, the

reorganisation was carried through in the formal sense; some federal entities were

renamed and gained some additional managerial autonomy. However, the division of

functions was only very imperfectly realised.

In late 2005, the government approved an ambitious Concept for Administrative

Reform, to be implemented over the period 2006-08. The time schedule of the document

planned for the reforms to be rolled out over the period 2006-08, which is no longer

realistic. The measures are mostly commendable, provided that performance

measurement remains to be seen as a tool for sectoral policy assessment (not as a tool for

budgetary decision making). A caveat is in order concerning merit pay, where OECD

experiences are rather mixed and where, in the Russian context, risks for new forms of

corruption are high.

Russia has very large public enterprise sector. Although Russia continues to pursue its

privatisation policy concerning small and medium-sized state unitary enterprises and

joint stock companies, government acquisitions concerning (very) large companies have

increased in the last few years. Although the imposition of effective market regulation

upon large firms is not an easy task, OECD experience shows that it is by no means

infeasible. Nothing suggests that government ownership is the optimal solution in these

cases. In this light, the Russian authorities may reconsider their privatisation policies of

the last few years.

Remuneration practices are not very transparent, mainly due to in-kind fringe benefits

such as housing facilities. Although central policies aimed at imposing minimum

standards for practices concerning recruitment, assessment and career development are

being formulated, thus far they have not been implemented.

5. Accounting and auditing

5.1. Accounting

Russia’s accounting system is based on accrual accounting. Both financial and non-

financial assets are covered by financial reports. During 2007, a revaluation of non-

financial assets was carried out in all sectors covered by the federal budget.58

At the federal level of government, accounts are drawn up in the accounting units of

ministries and federal agencies and services. Accounts are aggregated for the federal level

at the Ministry of Finance.

Financial reporting is well developed. In principle, three different kinds of reports are

compiled: monthly, quarterly and annually.

● The monthly reports on cash inflows and outflows present budget execution at a fairly

aggregate level. They present realisations on a cash-flow basis using Treasury data.

● The quarterly reports go into more detail. They present realisations (including a report

on financial results and a report on budget execution) using data from spending units

which are compiled and checked against Treasury data.

● The annual reports use data from each spending unit, which are checked by local

Treasury branches. The annual reports provide both cash and accrual information

(including a balance of budget execution, a balance of cash inflows and outflows, a

financial results report and a report on budget execution). In addition, there are annual

reports on the execution of the federal extra-budgetary funds.


BUDGETING IN RUSSIA

The quarterly reports on federal budget execution are submitted to the government

and Parliament. The annual report on federal budget execution is presented to Parliament

as a draft law and voted upon. In the period 2001-07, the State Duma received the draft law

on federal budget execution (of the budgets for 2000-05) around eight months after the end

of the budget year, then received the audit report of the Accounts Chamber on this draft

law around 11.5 months after the end of the budget year, and then started to consider the

draft law and the audit report around 14 months after the end of the budget year. In this

period, the laws on federal budget execution were approved around 15.5 months after the

end of the budget year, which was much longer than the 11 months envisaged by the

Budget Code.59 If the schedule foreseen by the Budget Code of 2007 is observed from 2008

onward, Parliament will receive the draft law on budget execution of the previous year

simultaneously with the budget for the next budget year and may be able to approve the

draft law within 12 months after the end of the fiscal year.

5.2. Internal audit

The Russian government sector does not yet have a uniform internal audit system:

there are no unified standards and procedures for internal audit; no legal requirement to

establish internal audit departments in the ministries, agencies and services; no

separation of internal control and audit; and no specifically qualified human resources.

However, since budget holders are responsible for internal control (see Section 4.1 above),

executive government bodies may establish internal audit units on their own initiative. An

example of such an initiative is the department of internal control and audit established

in 2005 within the Federal Treasury. The Federal Treasury has adopted a “concept of

internal control and audit development” which serves as a guideline for the activities of the

department. The department of internal control and audit reports to the deputy head of

the Treasury, and its activities include both internal control and audit.

The revision of the Budget Code in 2007 formally recognised the right of executive

government bodies to create internal audit units (Art. 270, para. 1). The new provision is

currently the only legal regulation for internal audit. It does not stipulate either the

independence of internal audit units or any other important principles of internal audit as

comprised in international standards. For the further development of internal audit in

Russia, it is important that basic standards and procedures, including the separation of

audit from internal control, are inserted in the Budget Code.

The Federal Service of Financial and Budgetary Control and Supervision

(Rosfinnadzor) is an executive governmental agency subordinated to the Ministry of

Finance. Its mandate is to carry out financial inspections of governmental units at the

federal and regional levels and of organisations receiving budgetary funds. The Service was

established in its present form in 2004 but has its roots in Soviet times (it was the Control

and Revision Department of the Ministry of Finance). It is staffed with approximately

5 000 officers and has 78 regional offices all over Russia. Although the Service fulfils roles

that are similar to those of internal audit units, its procedures are based more on

inspections and sanctions, and less on independent constructive advice to ministers and

heads of agencies and services. Furthermore, the Service focuses on legal compliance and

does not conduct performance assessments. The tasks of the Service overlap with those of

the Accounts Chamber, on the one hand, and those of the new internal audit units within

the ministries, on the other hand. When Russia wants to develop further its internal audit

function within the ministries, the future role of the Federal Service of Financial and


BUDGETING IN RUSSIA

Budgetary Control and Supervision should be clarified, perhaps as a much smaller internal

audit unit for a few large agencies (for instance, the tax service).

5.3. External audit

The Accounts Chamber of the Russian Federation is in charge of external audit. The

legal basis for the Chamber is provided by the Constitution (Arts. 101, 102, 103), by the

federal Law on the Accounts Chamber (1995), and by the Budget Code. The Accounts

Chamber was established in 1995. The State Duma appoints and dismisses the chair and

half of the auditors of the Chamber; the Council of Federation appoints and dismisses the

deputy chair and the other half of the auditors.

According to the Law on the Accounts Chamber, it is composed of the chair, the deputy

chair, the auditors and the staff. The Collegium is the Chamber’s managing body. It is

composed of the chair, the deputy chair and the auditors, the latter being the heads of the

specific chambers.60 Currently, there are twelve auditors in the Collegium. The Collegium

is responsible for drafting auditing methodology, controlling and reviewing operations, and

compiling reports to the Council of Federation and the State Duma. The Accounts Chamber

has 1 120 employees, including 769 staff carrying out audits on federal budget execution.

Included in the latter are 556 inspectors who bear responsibility for audits (as of

1 January 2007).61

The Law on the Accounts Chamber defines the functional and organisational

independence of the Chamber and grants professional independence to the members of

the Collegium. In addition, the law provides for procedures for dismissal. The budget of the

Accounts Chamber is presented to Parliament through the government, as a supplement to

the budget of the government.

According to the Law on the Accounts Chamber, it has seven tasks: exercising control

over timely execution of the budget; determining the effectiveness and expediency of

disbursement of state funds and use of state property; evaluating the justification for

income and expenditure items of the draft federal budget and federal extra-budgetary

funds; examining the financial consequences of draft federal laws; monitoring the

indicators established for the federal budget; exercising control over legality and timely

disbursement of federal budget resources; and regularly informing the two houses of

Parliament on the progress of budget execution. As from 2008, the Accounts Chamber will

start preparing opinions on the annual budget execution reports of the main budget

holders (these opinions should be produced not later than 1 June after the end of the

budget year). The mandate for these opinions is the amended Budget Code of 2007. The

Accounts Chamber audits the annual report on federal budget execution but does not audit

the annual report on financial results (including the budget balance).

The Accounts Chamber exerts its powers over the entire federal government

(including state unitary enterprises) of the Russian Federation as well as the extra-

budgetary funds. In addition, the Chamber audits those regional governments which

receive at least 60% of financing from the federal budget.

The annual plan of audit is subject to approval by the Collegium of the Accounts

Chamber. Approximately 20% of the planned activities under the audit plan of the

Chamber are obligatory audits. Other audits include those initiated by the Chamber itself,

but the government and the President can also propose audits to be included in the annual

audit plan.


BUDGETING IN RUSSIA

There are special audit authorities in charge of auditing sub-national governments,

such as the recently created regional chambers of accounts. The federal Accounts Chamber

co-operates with the regional chambers within the Association of Control and Accounts

Bodies of the Russian Federation.

The largest part of the work of the Accounts Chamber is devoted to financial audit.

This work is carried out by some 300 employees. Compliance checks and budget advice are

the second-largest task (400 employees). At present, only a small part of the work is

devoted to auditing performance. It is expected that the importance of performance audits

will increase in the coming years. Until now, there has been no legal mandate in the Budget

Code for performance audits.

There seems to be considerable overlap with the government’s audit activities, notably

with the activities of the Federal Service of Financial and Budgetary Control and

Supervision. This agency is subordinated to the Ministry of Finance and thus seen by the

line ministries as an external supervisory authority and not as an internal advisory unit.

The Accounts Chamber reports primarily to Parliament. Parliament receives: i) the

audit reports with the ex post opinion of the Chamber on the government’s reports on

budget execution and on execution of the extra-budgetary funds in the previous budget

year; ii) reports on the status of budget execution in the current year (on the basis of own

data of the Accounts Chamber – the Chamber does not give opinions on the government’s

quarterly reports on budget execution); iii) the ex ante opinion on the draft budget law,

including assessments of the economic forecasts of the government (GDP, inflation, oil

price, etc.); and iv) the annual report of the Accounts Chamber (on its own activities).

There are no committees in the houses of Parliament dedicated exclusively to the

consideration of the opinions of the Accounts Chamber, but some committees do deal with

its opinions together with other issues. The previous State Duma (fourth convocation) had

a Committee on Budget and Taxes62 within which there was a Subcommittee on Financial

Control, Accounting, Audit and Interaction with the Accounts Chamber (consisting of five

members). The composition of the Committee on Budget and Taxes of the present Duma

(fifth convocation) is not yet announced. The Council of Federation has a Committee on

Budget (consisting of 19 members) and a separate Committee on Interaction with the

Accounts Chamber. Neither the Committee on Budget and Taxes of the State Duma, nor its

Subcommittee on Financial Control, Accounting, Audit and Interaction with the Accounts

Chamber, considers the opinions of the Accounts Chamber in detail or holds hearings

about them. When the Council of Federation considers the draft law on federal budget

execution with the enclosed opinion of the Accounts Chamber, the main responsible

committee is the Committee on Budget. The Committee on Interaction with the Accounts

Chamber can give its opinion on an equal footing with other (sectoral) committees of the

Council of Federation to the Committee on Budget. The Committee on Interaction with the

Accounts Chamber does not hold hearings on the audit results of the Chamber. The only

parliamentary hearing concerning the budget is the above-mentioned hearing in

mid-September63 of the Council of Federation on the draft federal budget law for the

upcoming fiscal year, which is carried out by its Committee on the Budget.

For the effectiveness of the work of the Accounts Chamber, it is important that both

the State Duma and the Council of Federation establish strong procedures for following up

the findings of the Chamber. These procedures would have to include explicit recognition

of the rights of the parliamentary committees on interaction with the Accounts Chamber


BUDGETING IN RUSSIA

to: hold public hearings, to which responsible ministers would be invited; propose

amendments of the draft law on budget execution, to make visible the inappropriate use of

budgetary funds; and propose changes in legislation, to avert future misuse of funds.

Whenever audits of the Accounts Chamber reveal serious wrongdoings, the Chamber

can also submit reports to the judiciary or to the government. Regarding serious criminal

cases, the Accounts Chamber may be requested to report directly to the President. The

number of these special reports does not exceed five per year.

5.4. Conclusion

Financial reporting is well developed. Monthly, quarterly and annual reports provide

comprehensive insight on the progress of budget execution. The revised Budget Code

of 2007 foresees a tighter time schedule for the annual report (draft law on federal budget

execution) which will henceforth make it possible for Parliament to approve the draft law

within 12 months after the end of the fiscal year.

The Russian government sector does not yet have a uniform internal audit system.

The revised Budget Code of 2007 has formally recognised the right of governmental bodies

to create internal audit units, but thus far only a limited number of ministries, agencies

and services have done so.

The tasks of the Federal Service of Financial and Budgetary Control and Supervision

overlap with those of the Accounts Chamber, on the one hand, and those of the new

internal audit units within the ministries, on the other hand. When Russia wants to

develop further its internal audit function within the ministries, the future role of the

Federal Service of Financial and Budgetary Control and Supervision should be clarified,

perhaps as a much smaller internal audit unit for a few large agencies (for instance, the tax

service).

The Federal Law on the Accounts Chamber of the Russian Federation has created a

modern and comprehensive system of external audit. Thus far, the Accounts Chamber has

focused on financial and compliance audits, but it intends to develop its capacity and

undertake performance audits in the coming years. It is important that the Budget Code be

amended to explicitly recognise its mandate in this area.

There are no committees in the houses of Parliament dedicated exclusively to the

consideration of the opinions of the Accounts Chamber regarding the government’s reports

on federal budget execution, but some committees do deal with its opinions together with

other issues. Neither the Subcommittee on Financial Control, Accounting, Audit and

Interaction with the Accounts Chamber of the State Duma nor the Committee on

Interaction with the Accounts Chamber of the Council of Federation holds hearings on the

opinions of the Accounts Chamber. For the effectiveness of the work of the Chamber, it is

important that both the State Duma and the Council of Federation establish strong

procedures for following up the findings of the Chamber. These procedures would have to

include public hearings to which responsible ministers would be invited, and an explicit

recognition of the rights of parliamentary committees on interaction with the Accounts

Chamber to propose amendments of the draft law on budget execution that would

regularise inappropriate use of budgetary funds, and to propose changes in legislation to

avert future misuse of funds.


BUDGETING IN RUSSIA

6. Financial relations between levels of government

6.1. Federal structure of Russia

Russia is a federal state with a three-tier governmental structure: the federation, the

regional level and the local level.

The regional layer consists at present of 85 “Subjects of the Federation” (regions). They

are of six types: 21 republics, 47 oblasts, 1 autonomous oblast, 8 krais, 6 autonomous

okrugs and 2 cities of federal significance (Moscow and Saint Petersburg). The identity of

republics and autonomous okrugs is based on ethnicity. The distinction between the

various types of regions has little practical significance. Due to a policy of amalgamation

pursued by the government in recent years, the number of regions is being reduced from

89 in 2005 to a planned 84 in 2008. According to the Constitution, the Subjects of the

Federation have equal rights in their relations to federal authorities (Arts. 5.1 and 5.4). The

size of the regions varies considerably, both in terms of territory – from 1 081 km2 (Moscow)

to 3 103 200 km2 (Sakha Republic) – and in terms of population – from 42 000 (Nenets

Autonomous Okrug) to 10 358 000 (Moscow).

Each Subject of the Federation possesses its own foundation laws (constitutions for

the republics; charters for all others), political institutions and legislation.

In recent years, significant progress has been made towards greater consistency

between the regional and federal legal systems and a more unified economic and security

space across the federation. Most of the bilateral “treaties” between the federation and the

regions concluded in the early 1990s have now been rescinded, and regional legislation is

gradually being brought into line with the Constitution and the federal laws.

The lowest governmental level is the local level (or local self-government level). Local

governments are established to govern urban and rural settlements and other territories

mindful of historical and other local traditions.

Reformed in 2003, governmental bodies at the local level remain relatively new and

untested. The Federal Law on Local Self-government was enacted in October 2003. It seeks

to establish a uniform and universal system of local government throughout the country.

Full implementation has been postponed until 2009. The law calls for the creation of a two-

tiered system, composed of upper-level municipalities dealing directly with the regional

level (municipal districts and urban okrugs) and lower-level municipalities with no direct

relations with the regional level (urban and rural settlements within municipal districts).

There is a specific type of municipality for Moscow and Saint Petersburg (Cities of Federal

Significance) called intra-city territory.

As of 1 April 2006, there are 24 196 municipalities in the Russian Federation. The most

numerous type of municipality is rural settlement (82%), followed by urban settlements

and municipal districts (7.4%) and municipal urban okrugs (2.2%). The number and weight

of other types of municipalities cannot be estimated until the law of 2003 has been fully

implemented throughout the country.

6.2. Reform of sub-national finances

In 2004, the sub-national finances of Russia were radically reformed and put on a

modern footing. The revision of the Budget Code of 2004 laid down the basic principles,

including sub-national fiscal rules. The federal Law on the Distribution of Assignments

between Levels of Government of 2004 substantially changed the division of tasks between


BUDGETING IN RUSSIA

the federal, regional and local level of government and brought more consistency in the

delineation of spending mandates. On the revenue side, the main sources of funding were

identified. These consist of own taxes, shared federal taxes and transfers from the

federation and, for local governments, transfers from the regions. Unfunded spending

mandates, which were characteristic for the previous situation, can no longer occur.

Simultaneously, Russia started a new policy aimed at strengthening sub-national fiscal

autonomy and reducing the share of federal grants in sub-national revenue.

6.3. Sub-national expenditures

Clear assignment of spending mandates is necessary for the attribution of tax bases

and grants. The competences of each level of government are now set out in the Russian

Constitution, in the Law on the General Principles of Organisation of Legislative and

Executive State Bodies of RF Subjects, in the Law on Local Self-government and in some

other federal laws. Table 10 provides an overview of the distribution of the functional

expenditures of general government over the levels of government.

The Law on Local Self-government of 2003 contains a binding list of spending

mandates of municipalities. The law has led to substantial decentralisation from the

regions to the municipalities. Municipalities have become responsible for the development

and support of health resorts of local importance, the organisation and implementation of

civil protection against natural and technological disasters, the maintenance and

management of rescue services, and other tasks. The law stipulates that new mandates

Box 8. Types of municipalities

According to the 2003 Federal Law on Local Self-government, the types of municipalitiesare:

Upper level:

Municipal district, a group of municipal settlements (often along with the inter-settlement territories, i.e. territories located outside the territories of municipalsettlements) having common territory within which local self-government is carried out.Its bodies may exercise some state powers conferred on them by the federal and regionallaws. In practice, municipal districts are usually formed within boundaries of existingadministrative districts of the regions (rayons).

Municipal urban okrug, a municipal urban settlement not incorporated into a municipaldistrict, where local self-government is carried out. Its bodies may exercise some statepowers conferred on them by the federal or regional laws.

Intra-city territory of a federal city, a part of a federal city’s territory where local self-government is carried out.

Lower level:

Municipal urban settlement, a city/town or an urban-type settlement where local self-government is carried out directly by the populace and/or via local self-government bodieswhich are elected or selected by other means.

Municipal rural settlement, one or several rural localities where local self-government iscarried out directly by the populace and/or via local self-government bodies which areelected or selected by other means.

Source: 2003 Federal Law on Local Self-government.


BUDGETING IN RUSSIA

can only be transferred if adequate funding is provided by higher of levels of government

or if the tax base of the municipality is extended. In practice, this has often led to

additional higher-level regulations that unnecessarily constrain the municipal autonomy

and negatively affect the efficiency of service provision.

6.4. Sub-national revenues

Regional and municipal revenue comes mainly from federal grants and tax sharing.

Depending on the region, either grants or tax shares constitute the largest share of

revenues. Regional and local taxes constitute a less significant part of tax revenue. The

smallest part comes from non-tax revenues (charges for use of regional/municipal

property; fines, confiscations and other financial sanctions) and from entrepreneurial

activities. The weighted average revenue structure of a consolidated regional budget

(including revenues of the municipalities in the regional territory) is shown in Table 11.

The picture at the municipal level is roughly similar to that at the regional level.64

Municipal revenue comes mainly from tax shares (40%) and grants. The share of grants

(both regional and federal) in local revenues varies from about 30% to 80%. The largest part

of municipal grant revenues comes from the regions. Regional grants are often regulated by

federal legislation – for instance, equalisation grants should be based on per capita fiscal

capacities. The share of own municipal taxes is only a small per cent.

Table 10. Distribution of functional expenditure over levels of governmentIn per cent of total functional expenditurea

Functions Federal level Regional level Municipal level

Judicial system 89 11 0

Foreign relations and international co-operation 97 3 0

Basic research 99 1 0

National defence 100 0 0

National security and law enforcement 77 20 3

Bodies of internal affairs 62 33 5

Fire safety 33 62 5

National economy 36 56 8

Space activities 100 0 0

Recreation of mineral resources; water resources and forestry 89 11 0

Agriculture and fishing 24 70 6

Transportation 32 59 9

Housing and procurement of household suppliesb 9 49 42

Environmental protection 29 56 15

Primary education 22 26 52

Pre-school education, secondary education, basic professional education, youth policies and children’s health 1 21 78

Higher professional education 95 5 0

Culture, media and film making 29 39 32

Press editing 11 65 24

Health care and sport 14 68 18

Social policies 81 14 5

Pensions 100 0 0

Social services to the population 7 81 12

Orphanages 1 24 75

a) For the federal level inclusive of the expenditures of extra-budgetary funds.b) Electricity, heat, gas and water supply and sewerage.Source: Federal Treasury (2006), “Financial Reports”, Government of the Russian Federation, Moscow.


BUDGETING IN RUSSIA

All taxes, regardless of whether they are federal, regional or local, are based on federal

legislation. Within this federal framework, regional and local governments have a certain

autonomy within constraints set by federal legislation concerning the rate structure,

payment dates, and exemptions in regional and local taxation. Regional and local

governments can also remove own taxes. Box 9 shows the distribution of tax authority

among levels of government. Of all general government tax revenues in 2006, 57% went to

the federal budget and 43% went to regional and local governments.65

Regional and local taxes go entirely to the regions or municipalities, while federal

taxes go to different levels depending on the tax-sharing arrangement set in the federal

legislation (the Budget Code). Regions may share their tax revenues with local governments

by establishing their own regional tax-sharing system. Municipal districts may do the same

vis-à-vis municipal settlements. Table 12 provides an overview of the federal tax-sharing

arrangements.

6.5. Fiscal rules for sub-national governments

The Budget Code establishes strict limits on the deficit, total annual borrowing, debt

and expenditures on public debt servicing of sub-national government. For regions and

municipalities, debt should not exceed approved total annual own budget revenue

(exclusive of approved grants), and the deficit should not exceed 15% of approved total

annual own budget revenue. For regions and municipalities that have received federal (and

regional) grants exceeding 60% (regions) or 70% (municipalities) of their own budget

revenues (excluding subventions66) during two of the last three fiscal years, the allowed

debt is reduced by 50% of annual own budget revenues and the allowed deficit should not

exceed 10% of approved total annual own budget revenue (regions) or 5% (municipalities).

Spending on debt servicing for both regions and municipalities should not exceed 15% of

the total annual budget expenditure, exclusive of expenditures financed by subventions.

The federal Ministry of Finance carefully monitors the debt and deficit parameters of

regional governments. Breaching the limits triggers sanctions – for instance, suspension of

intergovernmental grants (other than subventions) until the limits are again respected.

If, in the last reporting year, unfulfilled commitments of a region or municipality

exceeded 30% of own budget revenues, a court may appoint an external financial

administrator with far-reaching competence in order to restore the solvency of the

government in question.

Table 11. Weighted average revenue structure of consolidated regional budgetsa

In per cent of total revenues

2002 2003 2004 2005 2006

Tax revenues 67.4 69.5 74.4 74.1 72.2

Non-tax revenues 6.9 8.1 8.3 5.7 5.6

Grants 16.0 14.8 9.0 14.7 15.9

Income from entrepreneurial and other income-generating activities

0.8 0.9 1.3 1.9 2.1

Other 8.9 6.7 7.1 3.6 4.2

Total 100.0 100.0 100.0 100.0 100.0

a) 2005-06 data are not fully comparable with prior years due to changes made in the revenue classification andchanges in local government structure.

Source: Ministry of Finance of the Russian Federation (2007), "Main Results and Trends of Budget Policy 2008-2010",Government of the Russian Federation, Moscow.


BUDGETING IN RUSSIA

6.6. Grants

There are mainly three types of grants (Art. 129 of the Budget Code): equalisation

grants (non-earmarked); subsidies (earmarked, either matching or non-matching); and

subventions (earmarked for financing delegated functions and federal mandates). Federal

equalisation grants, subsidies and subventions to regions and municipalities account for

40%, 34% and 18% of total federal transfers respectively. Table 13 provides an overview of

federal transfers in the budget for 2008-10.

The criteria for the distribution of grants are defined in the legislation. Grants to

regions are mainly formula-based. Non-earmarked equalisation grants are mostly given

from the Fund for Financial Support of Regions (see Section 6.7 below). Earmarked grants

are primarily provided as subsidies from the Co-financing Fund and as subventions from

the Compensation Fund. The Co-financing Fund was created for matching social

expenditures in regions/municipalities (social protection of labour veterans,67 payment of

family allowances, housing subsidies, etc.). The Fund also covers federal programmes for

regional socio-economic development. The Compensation Fund was created for financing

federal mandates at regional/municipal level. It covers expenditures for public housing

services and household supplies (electricity, gas, heating, water, etc.) of Second World War

veterans and disabled people. The Compensation Fund was expanded by 2.2% in real terms

in 2006. There are also some funds for earmarked regional development aid (not specified

Box 9. Distribution of tax authority under Article 12 of the Tax Code

Federal taxes and fees:

● Value-added tax.

● Excises.

● Personal income.

● Single social tax.

● Corporate profit tax (the rate is 24%, of which 6.5% goes to the federal budget and 17.5%to the regional budget. Regions are allowed to reduce the rate of 17.5% for certaincategories of taxpayers but not lower than 13.5%).

● Tax on extraction of minerals.

● Water tax.

● Fee for using the objects of fauna and of water biological resources.

● State taxes (fees).

Regional taxes:

● Corporate tax on property (the federal Tax Code sets the ceiling of the tax rate andcertain tax exemptions).

● Gaming tax (the federal Tax Code sets the floor and the ceiling of the tax rate).

● Transport tax (the federal Tax Code sets the floor and the ceiling of the tax rate).

Municipal taxes:

● Land tax (the federal Tax Code sets the ceiling of the tax rate and certain taxexemptions).

● Personal tax on property (the federal law on personal tax on property sets the floor andthe ceiling of the tax rate).


BUDGETING IN RUSSIA

Table 12. Tax shares of major taxes as established by the Budget Code

Federalbudget

Regionalbudgets

Municipal budgets

SettlementMunicipal districts

Urban okrugs

Tax-sharing rates (per cent)

Federal taxes and fees; taxes levied under special tax regimesCorporate profit tax levied at the rates established for the federal and regional budgets respectively

Rate 6.5100a

Rate 17.5100 – – –

Corporate profit tax (levied on income of foreign institutions, dividends and interest accruing to state and municipal bonds– withholding tax) 100 – – – –Personal income tax – 70b 10 20 30Corporate profit tax levied under production-sharing agreements 20 80 – – –Value-added tax 100 – – – –Excises on ethyl alcohol made of food raw materials; excises on alcohol-containing products 50 50 – – –Excises on ethyl alcohol made of any type of raw materials other than food 100 – – – –Excises on alcohol products – 100 – – –Excises on beer – 100 – – –Excises on tobacco products 100 – – – –Excises on motor gasoline, straight-run gasoline, diesel fuel, engine oils for diesel and carburettor (injection) engines 40 60 – – –Excises on passenger cars and motorcycles 100 – – – –Excises on excisable goods and products imported to Russia 100 – – – –Tax on extraction of minerals in the form of hydrocarbons (natural fire gas) 100 – – – –Tax on extraction of minerals (other than minerals in the form of hydrocarbons, natural diamonds and prevailing minerals) 40 60 – – –Tax on extraction of minerals from Russia’s continental shelf 100 – – – –Diamond extraction tax – 100 – – –Regular payments for extraction of minerals (royalty) under production-sharing agreements concerning production of hydrocarbons (other than natural fire gas) 95 5 – – –Fee for the use of water biological resources (except for inland water facilities) 70 30 – – –Fee for the use of fauna – 100 – – –Water tax 100 – – – –Single social tax at the rate established by the Russian Tax Code for the federal budget 100 – – – –Tax levied under a simplified taxation system (franchise tax)d – 90 – – –Tax levied in the form of patent value under a simplified taxation systemd – 90 – – –Single agricultural taxd – 30 30 30 –Single tax on imputed income from certain types of activitiesd – – – 90 90Regional taxes – 100c – – –Corporate property tax – 100 – – –Tax on gambling business – 100 – – –Transport tax – 100 – – –Local taxes – – – 100c 100c

Land tax – – 100 – 100

a) A company subject to the corporate profit tax pays the tax by the total rate 24% of its profits, of which 6.5% goes to thefederal budget and 17.5% to the regional budget.

b) Regions are obliged to set the share of the tax to be transferred to local budgets which should be not less than 10% of taxincomes received by the consolidated regional budget from the personal income tax [Art. 58(3) of the Budget Code].

c) Regional taxes and local taxes may have their own tax-sharing arrangement.d) The remaining 10% goes to the extra-budgetary funds (see the relevant paragraph in section 1.1 and the last paragraph in

section 4.5).Source: Ministry of Finance of the Russian Federation (2007), "Main Results and Trends of Budget Policy 2008-2010", Governmentof the Russian Federation, Moscow.


BUDGETING IN RUSSIA

in Table 10): the Fund of Regional Development (for infrastructure, school and hospital

construction, etc.) and the Fund of Regional and Municipal Finance Reform. The latter

allocates resources to sub-national budget reform on a competitive basis, and is managed

by the Ministry of Finance.

Beginning with the reforms of 2004, Russia has started a policy aimed at strengthening

sub-national fiscal autonomy. One of the objectives of this policy is the reduction of the

share of federal grants in consolidated regional revenues without shrinking the total

amount of federal grants and without increasing regional and local tax bases and shares in

federal taxes. This reduction can be realised by fostering the growth of own sub-national

revenues (non-tax revenue, rate increase of own taxes under the ceiling set in federal

legislation) and better fiscal discipline. To promote the reform, a new article was

introduced into the Budget Code (Art. 130), setting up conditions and in some cases

sanctions restricting regional budget policies. These restrictions aim to encourage regions

to develop their own tax base and to improve fiscal discipline. The article distinguishes

various categories of regions on the basis of the share of grants in their budget revenues.

Regions with a share of grants exceeding 60% (excluding subventions) are subject to the

most important restrictions. These regions should: i) conclude an agreement with the

Federal Ministry of Finance of the Russian Federation on how to increase the efficiency of

the budget expenditures; ii) open and run special accounts in the units of the Federal

Treasury for their transactions; iii) ask once a year for an external audit of annual reports

on budget execution to be carried out by the Accounts Chamber of the Russian Federation

or by the Federal Service of Financial and Budgetary Control and Supervision; and iv) take

other measures set by the federal legislation. The problem that this policy attempts to

address is well-known. OECD countries have encountered the same problem. The Russian

policy relies strongly on regulatory intervention. The Russian authorities may consider

incorporating more financial incentives – for instance, by moving away from earmarked

grants (that stimulate both federal and regional authorities to shift spending patterns in

the direction of subsidised services) towards non-earmarked grants – and providing larger

tax bases or tax shares to regional and local governments.

Table 13. Federal budget intergovernmental transfers in 2008-10Per cent of GDP

2008 2009 2010

Intergovernmental transfers total, including: 6.54 6.14 6.12

Intergovernmental transfers to consolidated regional budgets total, including: 2.66 2.30 1.98

Equalisation grants total, including: 1.08 0.99 0.92

Fund for Financial Support of Regions (FFSR) 0.94 0.89 0.84

Subsidies total, including: 0.91 0.76 0.54

Co-financing of capital development 0.33 0.25 0.16

Co-financing Fund 0.56 0.47 0.38

Subventions (Compensation Fund) 0.47 0.45 0.43

Other intergovernmental transfers 0.20 0.10 0.10

Intergovernmental transfers to federal extra-budgetary funds 3.89 3.84 4.14

Source: Ministry of Finance of the Russian Federation (2007), "Main Results and Trends of Budget Policy 2008-2010",Government of the Russian Federation, Moscow.


BUDGETING IN RUSSIA

6.7. Equalisation

The tax and service capacities of the Russian regions vary widely. Differences in

population size, mineral reserves, industrial development and per capita income create a

considerable gap between rich and poor regions. Currently only around 15 of the 85 regions

do not receive equalisation grants. As the Minister of Regional Development stated

recently, average GDP per capita differs by a factor of 35, the level of unemployment by a

factor of 29 and the level of investments by a factor of 158 between the richest and the

poorest regions. Hence the need for equalisation is obvious in Russia.

The main equalisation instrument is the Fund for Financial Support of Regions.

Originally (in 1995) the size of the Fund was calculated as a percentage of the revenues of

the value-added tax, and later as a percentage of total federal tax receipts. The

methodology started to change substantially as of 2001, and currently the total

equalisation grant pool depends on the regional entitlements calculated under the new

equalisation rules.

The general formula used to distribute equalisation transfers was developed by the

Ministry of Finance and has been repeatedly modified with the purpose of making it more

objective and transparent. The grant distribution methodology is based on the following

principles:

● The use of official statistics independent from the federal Ministry of Finance and from

regional governments.

● The assessment of regional revenue capacity based on their tax capacity.

● The assessment of regional service capacity based on the number of public service users

and the costs of public services.

When calculating transfers, the government takes into account consolidated revenues

and expenditures of a region (including municipal revenues and expenditures in its

jurisdiction). In order to select regions eligible for an equalisation grant, a special indicator

measuring fiscal and service capacity of a region is calculated.

Amounts from the Fund are allocated in three steps. First, an amount is allocated to

the poorest regions whose capacity indicator is below 60% of the national average. The

grant narrows the gap between the capacity indicators of the regions concerned and the

60% threshold by 85%. In the second stage, each region whose capacity indicator is below

the national average receives an amount which reduces the distance from the national

average by a certain percentage uniform for all recipient regions. In the third stage, the

regions whose equalisation grants decreased compared to the previous year receive a

bonus. Regions whose grants grew by more than 7% compared to the previous year are

penalised. The size of the bonus depends on the efficiency of fiscal management (the

efficiency measures are: tax revenue growth above the Russian average level; debt

reduction above the average reduction rate for all regions; and the size of the debt relative

to total revenues of a region compared with the Russian average). The sum of penalties is

equal to the sum of bonuses and is distributed among regions in proportion to the change

in the equalisation grant.

The formula for the equalisation grant is transparent and differs greatly from the

previous practice when equalisation transfers were bilaterally negotiated between regional

and federal governments. Moreover, the methodology seems to combine two important


BUDGETING IN RUSSIA

requirements: first, providing equal service levels at equal tax costs and, second,

stimulating convergence in tax and service capacity. However, the methodology has only

recently been introduced and its effect on the longer term remains to be seen.

In recent years, the share of the grants from the equalisation fund in regional revenue

has been shrinking. From 2005 to 2007, it fell from 38.9% to 33.2%. This does not mean that

the amount of equalisation grants was falling, but that that these grants have been growing

at a slower pace than other grants. The real problem concerning grant dependency in

Russia does not lie in the equalisation grants but in other grants, mostly earmarked.

At the regional level, fair and transparent equalisation policies for local governments

are still largely lacking. An important problem is the lack of good statistical data about local

tax bases and service needs. This lack may result in simple distribution formulas that are

not always fair and efficient. Moreover, the lack of data may lead to highly discretionary

policies to correct undesired results. Regions may choose to allocate grants from a regional

pool to all municipalities directly, or use a two-step procedure by equalising municipal

districts and urban okrugs from the regional pool and then letting districts equalise

settlements. The second approach is the most common as it involves less effort from the

regional level.

6.8. Conclusion

In 2004, the sub-national finances of Russia were radically reformed and put on a

modern footing. The revision of the Budget Code of 2004 laid down the basic principles,

including sub-national fiscal rules. The federal Law on the Distribution of Assignments

between Levels of Government of 2004 substantially changed the division of tasks between

the federal, regional and local level of government and brought more consistency in the

delineation of spending mandates. Simultaneously, Russia started a new policy aimed at

strengthening sub-national fiscal autonomy and reducing the share of federal grants in

sub-national revenue.

The decentralisation of spending mandates in Russia is relatively large:

responsibilities in the social domain are mainly transferred to the regional and local levels;

regions and municipalities are free to set standards for service provision within a federal

framework; regions set their own wages for public employees. On the other hand, fiscal

autonomy on the revenue side has lagged behind the decentralisation of spending

mandates. This has led to a discrepancy between fiscal autonomy and spending mandates,

which has to be bridged by federal grants. This situation is not unique to Russia but is

increasingly characteristic for many OECD countries.

The Law on Local Self-government of 2003 reformed the structure of local government

on a uniform basis throughout the Russian territory and clarified the distribution of

spending mandates over regions, upper-level municipalities and lower-level

municipalities. The implementation of this law has taken longer than expected and is not

yet fully completed.

Tax shares are the most important source of tax revenue for regions and

municipalities. However, this source of sub-national revenue has in recent years been

rather volatile due to frequent changes in sharing arrangements and annual renegotiations

(OECD, 2004). It is expected that the introduction of three-year budgets in the Budget Code

revision of 2007 will bring more stability in this respect and will enable sub-national

governments to engage in fiscal planning in the medium term.


BUDGETING IN RUSSIA

The federal government is unwilling to increase the size of sub-national tax bases and

shares in federal taxes. As a consequence, sub-national governments are increasingly

dependent on federal grants. Recent federal policy aims to counter this trend by actively

promoting sub-national budgetary discipline and methods of result-oriented budgeting.

This policy relies strongly on regulatory intervention. The Russian authorities may

consider incorporating more financial incentives – for instance, by moving away from

earmarked grants (that stimulate both federal and regional authorities to shift spending

patterns in the direction of subsidised services) towards non-earmarked grants – and

providing larger tax bases or tax shares to regional and local governments.

Following the revision of the Budget Code in 2004, Russia has introduced a modern

system of equalisation based on indicators for tax and service capacity. The system is

designed to bridge the great disparity in prosperity of the Russian regions. Equalisation

grants are the main instrument of fiscal equalisation, and their share in the total amount

of federal grants is very large. One of the features of the system is that it contains financial

incentives for regions to develop their own tax base (under the ceiling set in federal

legislation) and thus to reduce the role of equalisation grants in their budgets. The system

is transparent but rather complicated, especially as far as the financial incentives for tax

base development are concerned. The effects of these incentives in the longer term remain

to be seen.

At the regional level, fair and transparent equalisation policies are still largely lacking.

An important problem is the lack of good statistical data about local tax bases and service

needs.

Notes

1. Data for 2007 not yet available.

2. Average number of children per woman.

3. Public enterprises (a large sector in Russia) are not included in the government sector. Contrary towidespread belief, in terms of employment the government sector is not particularly large inRussia (on this point, see also OECD, 2006, Chapter 3).

4. For instance, the numbers for France, the United Kingdom and Spain are the following: France 1.5%agriculture, etc., 23.2% industry, 61.6% services of which 27.4% public administration, etc.; theUnited Kingdom 0.7% agriculture, etc., 21.1% industry, 66% services of which 30.7% publicadministration, etc.; Spain 3.2% agriculture, etc., 30.9% industry, 51.8% services of which 20.8%public administration, etc. (IMF, 2006b; OECD.Stat database; ILO database).

5. The enormous increase in revenues from oil production (more than 200% over the period 2000-05)is largely due to the price increases and taxation and to a much smaller extent to increased output(about 60%). Furthermore, the increase in oil production has been falling fairly dramatically overthe last years (oil production rose just 2.5% in 2005 as compared with an average of 8.5% annuallyover the period 2000-04). Infrastructure constraints and lack of investments have been importantfactors in bringing about this deceleration. Output in the inefficient gas sector has virtuallystagnated since the beginning of the 21st century, whereas revenues from gas have increased bymore than 80% (OECD, 2006).

6. “Dutch disease” is the phenomenon whereby permanent real appreciation of the currency (nominalappreciation plus inflation), induced by commodity exports, impairs the competitiveness ofdomestic production sectors in tradable goods, both in foreign and domestic markets. Thishappened in the Netherlands during the 1980s as a consequence of increasing exports of natural gas.

7. Investment rates in Russia are also diverging sharply between sectors. In some sectors, such asagriculture, food products, refined petroleum products and nuclear fuel, machinery andequipment, transport equipment, electricity, gas and water supply, and construction, investmentrates have been particularly low (less than 10% or negative year-on-year growth in 2005).


BUDGETING IN RUSSIA

8. The IMF has been critical of the exchange rate policy of the Central Bank and has advised theRussian monetary authorities over the years to focus on inflation, rather than on the double (andinconsistent) objectives of inflation and exchange rate control (IMF, 2005, 2006a and 2007).

9. C.i.f. means including (transport) costs, insurance and freight.

10. Namely until 2007: all revenues in excess of the cut-off price. After 2007: all oil revenues minus theoil transfer (see Box 2). In the period between 2004 and 2007, this amounted roughly to a sharebetween one-third and a half of federal oil revenues. For 2008, the share will be 14.7% of the federaloil revenues (on the basis of the very cautious oil price assumptions of the budget).

11. Sub-national government also has some oil revenues, mainly through its 5% of the mineralextraction tax on hydrocarbons.

12. The IMF estimates expenditures at 1.8 percentage points higher, non-oil revenue 1.1 percentagepoints higher and oil revenues 1 percentage points higher in 2010 (IMF, 2007). These differences aremainly due to different assumptions concerning the spending of the unallocated margin inthe 2008-10 budget.

13. In the years 1995-98, there were large general government deficits which were financed bygovernment bonds with double-digit interest rates. This crowded out private investment.From 1990 to 1998, real investment fell continuously (OECD, 2004).

14. Oil price upsurges have increased federal oil revenues by 1.6 percentage points of GDP over theperiod 2005-07 (compared to 2004), so that the real costs of the additional spending programmeswere 2.6% of GDP.

15. Oil exports have increased slightly less than 50% over the period 2000-05. Oil prices have increasedabout 90% over the same period.

16. That is, 100% of the federal share of this tax; the remaining share of 5% goes to the regions.

17. See the last paragraph in Section 1.1 above.

18. Ex ante, the Central Bank sets two implicit targets: an upper limit for real appreciation (nominalappreciation plus inflation) and an inflation target. In 2006, the upper limit for real appreciationwas fixed at 9% and the inflation target was set at 8.5%. This basically represents a policy of fixednominal exchange rate (OECD, 2006).

19. The role of mandatory reserve requirements for the commercial banks and other sterilisationinstruments is very small in Russia (OECD, 2006).

20. This view is consistently put forward by the IMF in its annual “Article IV” reports on Russianfinancial policies, but not dealt by the Russian authorities (see note 8 above).

21. The report noted, however, that at the time there was no separate reporting on tax revenuesflowing from the oil sector and consequently no reporting on the non-oil balance, which was seenas a major weakness. (This problem has been addressed since then.) Similarly, there was noreporting on governmental financial assets (considered as confidential) and only partial reportingon contingent liabilities and tax expenditures.

22. Except some dozens of accounts mainly in the defence sector.

23. In health and education, the bulk of spending is on salaries for workers in these sectors who havelong been among the worst-paid professionals in Russia. The housing project provides for creditguarantees and interest rate subsidies. The agriculture project provides for subsidies to theagricultural sector.

24. Private sector applicants must submit their proposals first to the relevant ministry andsubsequently to a commission attached to the Ministry of Economic Development and Trade. Thefinal decision is made by a government commission chaired by the Minister of EconomicDevelopment and Trade.

25. Tax incentives accorded to residents of such zones may include exemption from regional propertytaxes for the first five years, accelerated depreciation of capital investment, greater freedom tocarry over losses to following years, the subtraction of research and development costs from taxliability, the exemption from customs duty and VAT on imports and excise duties on domesticpurchases, and the exemption of customs duty, VAT and excises on exports.

26. Regional and local budgets can cover one year or three years, depending on regional legislation.

27. In each three-year budget, the estimates for the out-years are based on current inflation forecasts.

28. Namely, as it was in the previous budget, which does not preclude growth from year to year.


BUDGETING IN RUSSIA

29. In a rolling framework, such measures can be taken annually in the last out-year. In a periodicalframework, they can be done every two, three or four years in all years of the framework.

30. The new fiscal rules are mainly in accordance with the recommendations of the OECD (2006),except that on some aspects a still more cautious course is chosen (resources of the Reserve Fundcan only be invested in government bonds and not in more risky assets, and yields of theProsperity Fund have to be saved and cannot be used to finance structural deficits).

31. Since in Russia the gap between the living standards of present and future generations must beexpected to be larger than in more prosperous countries, some current spending out of oilrevenues is justifiable from the point of view of intergenerational equity.

32. The IMF has noted that “the assumed spending cut of 2% of GDP was ambitious, considering thatthe federal government’s non-interest expenditures amount to only 16% of GDP” and that “muchof the savings would have to come from socially difficult cuts in education, health and other socialsectors in the run up to the 2011 elections – and that efficiency-enhancing reforms in these sectorshad stalled”. In reply, the Russian authorities were adamant that the required retrenchments willbe implemented (IMF, 2007).

33. To the market sector (quasi-corporate sector in the terminology of the national accounts) belongboth the public enterprise sector and the (commercial) private sector.

34. The IMF (2004) mentions 22 000 state unitary enterprises at all levels.

35. Except some commercial activities in the defence sector.

36. The fact that non-tax revenues are brought under the Treasury does not automatically mean thatthey are put on budget. For instance, the IMF (2004) mentions a lawsuit by several educationalinstitutions that wanted to keep non-tax revenues off budget. The verdict upheld this claim whilemaintaining that the revenues had to be handled through the Treasury account. The Ministry ofFinance opposed this possibility.

37. Since in 2007 there was no previous three-year budget, for the 2008-10 budget this updatingexercise was based on the multi-annual estimates of the 2007 budget.

38. These observations are based on reasoning (from the revised Budget Code) rather than onexperience, since there was no previous three-year budget when the budget for 2008-10 wasestablished.

39. This implies that agreement is not required at line-item level.

40. The expenditure limit is the baseline plus the ministry’s share of the distributed envelope.

41. The limits mentioned in this and the previous bullets do not include the undivided envelopes forthe out-years, since these envelopes are held at the Ministry of Finance.

42. See the related paragraph in Section 1.2.

43. However, whereas other laws are assumed to be approved by the Council of Federation if they arenot examined within 14 days after they have been submitted, budget laws must compulsorily beexamined by the Council of Federation (Art. 106 of the Constitution).

44. See the related paragraph in Section 2.5.

45. See Section 6.6 below for the concepts of subsidies and subventions.

46. In contrast to some OECD countries, all mandatory spending (spending on entitlement laws) is onbudget in Russia.

47. Under the revised Budget Code, oil and gas revenues available for expenditures are limited to thefixed oil and gas transfer, so that all oil and gas revenue windfalls flow into the Oil StabilisationFund (see Box 2 above).

48. For instance, Australia, France, the Netherlands, Sweden and the United Kingdom.

49. The Ministry of Finance is responsible for long-term borrowing.

50. Federal expenditures include transfers to sub-national government, which are counted againwhen they are spent. There is thus an overlap between the numbers for federal and sub-nationalspending.

51. Presidential Decree No. 824 of 23 July 2003, “Administrative Reform: Measures in 2003/2004”.


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52. Presidential Decree No. 314 of 9 March 2004, “On the System and Structure of Federal ExecutiveAuthorities”, revised by Presidential Decree No. 649 of 20 May 2004, “Issues of Federal ExecutiveAuthorities Structure”.

53. In relation to citizens.

54. “Direct” means under the direct supervision of the President (five services, two agencies).“Indirect” means services and agencies supervised by federal ministries that are under theauthority of the President (four services, one agency).

55. The five presidential ministries are: Ministry of the Interior (supervises one service), EmergencyMinistry, Ministry of Foreign Affairs, Ministry of Defence (supervises three services and oneagency), Ministry of Justice. The five presidential services are: Service of Communication byCourier, Service of External Investigation, Federal Security Service (FSB), Service of Drug TrafficControl, Federal Protection Service. The two presidential agencies are: Central AdministrativeAgency of Special Programmes of the President, Administrative Office of the President.

56. The 11 governmental ministries are: Ministry of Health and Social Development (supervises threeservices and three agencies), Ministry of Information Technologies and Communications(supervises two agencies), Ministry of Culture and Media (supervises three agencies), Ministry ofEducation and Science (supervises two services and two agencies), Ministry of Natural Resources(supervises one service and three agencies), Ministry of Industry and Energy of the RussianFederation (supervises three agencies), Ministry of Regional Development (supervises one agency),Ministry of Agriculture (supervises one service), Ministry of Transportation (supervises one serviceand five agencies), Ministry of Finance (supervises three services and the Treasury Agency),Ministry of Economic Development and Trade (supervises two agencies).

57. The Public Service law (Federal Law No. 119-FZ of 31 July 1995, “On the Fundamentals of PublicService in the Russian Federation”) and Presidential Decree No. 885 of 12 August 2002, “On theApproval of General Principles of Official Behaviour for Public Servants”.

58. Order 306/120n/139 of the Ministry of Economic Development and Trade, the Ministry of Financeand the Federal Service of Statistics, 2 October 2006.

59. Similarly, the draft law on federal budget execution in 2006 will probably be approved in April 2008.

60. Federal Law No. 4-FZ of 11 January 1995, “On the Accounts Chamber of the Russian Federation”,para. 4-7.

61. Source: Annual Report of the Accounts Chamber, 2006.

62. See the relevant paragraph in Section 3.2 above.

63. See the relevant paragraph in Section 3.2 above.

64. Table 11 shows the revenue structure of consolidated regional revenues in which local revenuesare included. The resulting picture is largely determined by the regional revenues which are muchlarger than the local revenues.

65. Source: Ministry of Finance of the Russian Federation.

66. See Section 6.6 on the concept of subventions.

67. A labour veteran is a person, usually of retirement age, distinguished by the state (in the Soviet era)for his/her special professional achievements.

References

Bergvall, D., C. Charbit, D. Kraan and O. Merk (2006), “Intergovernmental Transfers and DecentralisedPublic Spending”, OECD Journal on Budgeting, 5(4).

Federal Treasury (2006), “Financial Reports”, Government of the Russian Federation, Moscow.

IMF (2004), “Russian Federation: Report on the Observance of Standards and Codes – FiscalTransparency Module”, IMF Country Report No. 04/288, International Monetary Fund,Washington DC.

IMF (2005), “Russian Federation: 2005 Article IV Consultation – Staff Report; Staff Statement; and PublicInformation Notice on the Executive Board Discussion”, IMF Country Report No. 05/377,International Monetary Fund, Washington DC.


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IMF (2006a), “Russian Federation: 2006 Article IV Consultation – Staff Report; Staff Statement; andPublic Information Notice on the Executive Board Discussion”, IMF Country Report No. 06/429,International Monetary Fund, Washington DC.

IMF (2006b), “Russian Federation: Statistical Appendix”, IMF Country Report No. 06/431, InternationalMonetary Fund, Washington DC.

IMF (2006c), “Russian Federation: Selected Issues”, IMF Country Report No. 06/430, InternationalMonetary Fund, Washington DC.

IMF (2007), “Russian Federation: 2007 Article IV Consultation – Staff Report; Staff Statement; and PublicInformation Notice on the Executive Board Discussion”, IMF Country Report No. 351, InternationalMonetary Fund, Washington DC.

Institute of the Economy in Transition (2003), “Transitional Period Economy. Essays on Economic Policyof the Post Communist Russia, 1998-2002”, Institute of the Economy in Transition, PublishingHouse “Delo”, Moscow.

Institute of the Economy in Transition (2007), “Russian Economy in 2006 – Trends and Outlooks”,Institute of the Economy in Transition, Moscow.

Ministry of Economic Development and Trade (2005), Annual Report on the Results of the Socio-economicDevelopment of the Russian Federation in 2004 and Tasks for Economic Policy of the Government of theRussian Federation for 2005, February, Government of the Russian Federation, Moscow.

Ministry of Finance of the Russian Federation (2007), “Main Results and Trends of Budget Policy2008-2010”, Government of the Russian Federation, Moscow.

OECD (2001/2002), OECD Economic Surveys: Russian Federation, Volume 2002/5, OECD Publishing, Paris.

OECD (2004), OECD Economic Surveys: Russian Federation, Volume 2004/11, OECD Publishing, Paris.

OECD (2006), OECD Economic Surveys: Russian Federation, Volume 2006/17, OECD Publishing, Paris.

Rosstat (2007), “Report on the socioeconomic situation of the Russian Federation for January-July 2007”, Rosstat, Moscow.

Rosstat (2008), Statistical Yearbook 2007, Rosstat, Moscow.


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